Revocable Living Trusts

An important estate planning goal for many individuals is to be sure that their money and assets ultimately passes to their loved ones, rather than their creditors. One common estate planning tool used for this purpose is the trust. Essentially, a trust is a legal arrangement under which the creator (often called a “trust maker”) transfers ownership of assets into the care of a person, two people or a trust company (the “trustee”) to be administered for the benefit of another person or group of people (the “beneficiaries”). The document that establishes the responsibilities of the trustee and the rights of the beneficiaries is called the “trust instrument,” “trust agreement” or simply “the trust.”

A revocable living trust does not protect your assets from your creditors. This is because a revocable living trust can, by its terms, be changed or terminated at any time. Due to these terms, the trust creator maintains ownership of his or her assets. Therefore, a creditor could force the owner of a revocable living trust to terminate the trust and surrender the assets.

Irrevocable Trusts

One type of trust that will protect assets from creditors of the beneficiary is an irrevocable trust. Once the trust maker establishes an irrevocable trust, he or she no longer legally owns the assets he or she transferred to the trust, and can no longer control how those assets are invested or distributed. By creating an irrevocable trust, the trust maker surrenders the ability to later modify the trust instrument.

Due to the change in ownership of assets, a future creditor of a beneficiary cannot satisfy a judgment against the assets held in irrevocable trust. This is true even where the trust creator establishes himself as the beneficiary of a discretionary trust.  However, Arizona trust law provides that if the trust maker is the beneficiary of the trust the assets in the trust are not protected from the trust maker’s creditors. It’s critically important to understand that the extent of protection turns largely on state law issues.

Importantly, a court can undo an individual’s transfer to a trust if it finds that the transfer was made with the intention of defrauding creditors. These transfers are considered fraudulent, and in many cases carry significant legal penalties. This is why it is important to practice asset protection planning well before you even anticipate being the subject of any liability. Moreover, it is imperative that you work closely with experienced and credible legal counsel before engaging in asset protection.

Unless you tell us otherwise, the trust we create for you will provide life-time asset protection for your loved ones who become beneficiaries of the irrevocable trusts created for them after you die.  This means that the inherited assets in the beneficiary’s trust are protected from the beneficiary’s creditors, ex-spouses and the bankruptcy court.

About the Trustee of a Trust

You will be the initial trustee of your trust. The trustee has the legal obligation to manage the trust’s assets for the benefit of the current beneficiary or beneficiaries of the trust. As trustee you have complete power over all assets owned by the trust.

A successor trustee is a person, trust company or public fiduciary who becomes a trustee of your trust if you were to die, become mentally incapacitated or resign as trustee. Because a successor trustee will have control of the assets in the trust you should take care on who you appoint to be a successor trustee or co-trustee. Your trust could appoint two people to become co-trustees in which case they would each have control of trust assets and be obligated to carry out the terms of the trust.