The revocable living trust is designed to achieve two important goals: avoiding probate and (for some married couples) avoiding Federal Estate Tax.
Many people ask their attorneys whether placing their assets in such a trust will protect those assets from creditors. The answer is, not absolutely, but maybe – at least temporarily.
Because the assets in a revocable living trust are still controlled by the grantor (who usually serves as original Trustee) such a trust is not a roadblock against the creditors of the grantor. Holding one’s assets in a revocable living trust is no guarantee against the seizure of those assets by a judgment creditor of the grantor. Nevertheless, such a trust may be an effective speed bump, significantly impeding the efforts of a creditor to enforce payment of a debt from the grantor.
There’s a law in California that provides some assistance to the grantor/debtor, limiting the enforcement of judgments against him/her: Under provisions of the Code of Civil Procedure, the courts have jurisdiction over the assets of a trust, for purposes of determining to what extent creditors may levy on such assets. According to Section 709.010 et sec, a creditor must petition the court for permission to access trust assets, before seizing them – even after the creditor has sued the grantor/debtor and obtained a judgment and a writ of execution.
This doesn’t give the debtor a free pass. The law simply requires that the creditor do more paperwork and go to court for an order establishing the terms and conditions of any execution on trust assets.
The cost of such proceedings might deter some creditors from bothering to go after such assets. Further, at least theoretically, by holding assets in a revocable living trust a debtor might buy some time, either to negotiate with the creditor or to re-position the assets – without, of course, making a transfer which would constitute a fraud on creditors. You can’t simply put your house and bank accounts in your brother-in-law’s name and expect that you have insulated such assets from your creditors.
So, although the trust is not a firewall, it may be a useful speed bump, affording some limited protection to the debtor.
Jerry Kessler practices law in Santa Clarita. He can be reached at 661-255-1001.