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Does a Living Trust Protect Your Assets from Lawsuits?

Sarah Edwards | November 23, 2022

Summary: A living trust is a legal arrangement set up by someone who wants to protect their assets and ensure the correct distribution of those assets when they die. Only irrevocable living trusts offer near total protection of assets from lawsuits. The only downside is that transfer of ownership title is permanent with irrevocable trusts. If the grantor finds changes to the trust are necessary for the future, they may need to go to court to make them.

Many people use estate planning tools to ensure that their family is protected and their wishes carried out upon their death. One common estate planning instrument is a living trust. Living trusts help beneficiaries avoid probate, which can be long, expensive, and arduous. In some cases, living trusts can also protect assets from lawsuits.

Not all living trusts protect assets from a lawsuit. If you’re concerned about keeping your property safe from a potential claim, you’ll want to choose the appropriate type of living trust.

What is a living trust?

A living trust is a legal arrangement set up by a party who wants to protect their assets and ensure the correct distribution of those assets according to their intentions upon their death. If the individual sets up the trust correctly, there’s no need for their property to go through probate once the grantor passes away.

Typically, a grantor sets up a living trust with the help of their estate planning lawyer. The living trust consists of a legal document that establishes the terms and the assets included in it.

The grantor assigns a trustee, who maintains control of the assets upon the grantor’s death and distributes them according to its terms. The eventual recipients of the assets held in a living trust are its beneficiaries, whom the grantor designates when creating the trust.

The trustee has a special duty, known as fiduciary responsibility, to care for the assets in their possession and manage them in the beneficiary’s interests.

Living trusts are typically complex. Only qualified estate planners should establish them since the legal terms for the trust and its terms must be precise.

Most estate planners consider a living trust more practical than a will because it goes into effect while the grantor is alive. The grantor may actively change certain types of living trusts as the need arises.

There are two types of living trusts: a revocable living trust and an irrevocable living trust.

What types of assets does a living trust include?

Individuals may include any assets that hold either financial or sentimental value in a living trust. Common types of property that individuals have in living trusts include:

  • Real estate, like homes, land, or commercial property
  • Personal property, like jewelry or artwork
  • Ownership in a business
  • Checking or savings accounts
  • Stocks and bonds
  • Mutual fund accounts
  • Title to receivables
  • Life insurance policies
  • Some types of annuities

Grantors may include almost any type of asset in a living trust. However, specific retirement plans, like a 401(k) or IRA, should not be held in the trust because of potential adverse tax implications.

What is a revocable living trust?

A revocable living trust is the most common type of living trust. The individual who establishes the trust maintains control of all assets in the trust until they die. The revocable living trust remains fluid; the grantor can change its terms at any point and add or remove assets as they please. They can also add or remove beneficiaries.

A revocable living trust remains in effect until the grantor dies or terminates it. The trust’s primary purpose is to ensure the proper transition of assets if the grantor becomes too ill to manage them or passes away.

Usually, a revocable trust includes language that it is to become irrevocable upon the grantor’s death.

What is an irrevocable living trust?

The main difference between a revocable and an irrevocable living trust is the ownership of assets. In a revocable trust, the grantor maintains complete control and ownership of the property until they no longer have the mental or physical capacity to manage them.

In an irrevocable trust, the grantor transfers ownership of all the property in the trust to the trustee.

Irrevocable trusts cannot be changed or amended once they go into effect. The terms define the use of the assets and the beneficiaries. A grantor of an irrevocable trust can’t appoint themselves as trustee. The trustee whom the grantor designates becomes the owner of the assets.

An irrevocable trust is the only type that can completely protect an individual’s assets from a lawsuit or a creditor. People susceptible to legal claims, like business owners or doctors, may find an irrevocable living trust attractive.

However, grantors of irrevocable trusts must understand that while the trust offers almost total protection from lawsuits, it’s virtually impossible to change. Transfer of ownership title is permanent. If the grantor finds changes to the trust are necessary for the future, they may need to go to court to make them.

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