Doesn’t a trust protect my assets?
Many, many people believe that once they form a “trust,” their assets in the trust will be protected against any creditor claims. However, a good number of those people have a revocable living trust in mind – that is, the usual family trust people form to manage or distribute their property upon death or incapacity. When most people mention a “trust,” they are talking about the revocable living trust that allows them to add or remove property at any time, or to terminate the trust. Unfortunately, this type of trust does NOT protect your assets. Because you are able to terminate the trust and remove its assets at any time, the law treats the assets essentially as yours in terms of allowing creditors to attach the assets in the trust.
Traditionally, an irrevocable trust could serve the purpose of protecting against creditors. With an irrevocable trust, the person who creates the trust (the settlor) relinquishes ownership and control to all assets in the trust. Since the settlor no longer owns the property, it is not considered his/hers for creditors to be able to attach for the settlor’s personal debts. A main hesitation about this trust is that people are uncomfortable with the idea of relinquishing ownership and control over their trusts.
Self-Settled Spendthrift Trusts
In 1999, Nevada enacted laws to create the self-settled spendthrift trust, also known as the Nevada domestic asset protection trust. This trust differs from a traditional irrevocable trust in that the person who creates the trust (the settlor) can still be a beneficiary and retain some control over the assets, even though he/she cannot retain ownership over them. The settlor can serve as a trustee to have a role in the management of the trust. (See my page on Nevada Domestic Asset Protection Trusts for some FAQ’s.)
In sum, do not make the unfortunate mistake of thinking that setting up a living trust will protect your assets. Remember that even if you set up the right trust to protect your assets, the law will not protect the assets until two years after you transfer the property to the trust. Thus, if you intend to form a trust for asset protection purposes, the sooner the better to get past that two-year period.