When clients ask about setting up a Living Trust (also known as a Revocable Trust), they often want to know if the Trust protects against the claims of a creditor. The answer, like many things in the law, is that “it depends.” For the most part, a Living Trust is an estate planning tool to avoid probate and is not an asset protection tool to avoid creditors.
If a person (known as the “settler”) sets up a Living Trust, the Trust does not offer any direct creditor protection against claims asserted against the settlor. In other words, if the settler owns an asset that is subject to a creditor claim–such as from a lawsuit–putting the asset in a Living Trust does not protect the asset. The main reason for this is that owning assets in a Living Trust is seen as just an alternate way for the settler to own the asset. But because the Trust is still subject to amendment and revocation, and because the settler still has all benefits of ownership–such as control of the asset–the Trust doesn’t protect against creditors. In order to protect against creditor claims, a Trust would have to be irrevocable and the settler could not control the assets.
While not offering greater asset protection, if correctly set up by an estate attorney, a Living Trust also does not cause any greater exposure. In other words, putting the asset in the Trust does not cause it to be less protected. For example, a person’s primary residence in Florida is protected homestead and is not subject to the claims of creditors. If placed in a correctly drafted Living Trust, the homestead protection continues even when the home is held in the Trust.