WHY REVOCABLE LIVING TRUSTS DO NOT PROTECT ASSETSThe basic reason that a Revocable Living Trust does not protect your assets from personal judgment creditors is simply because you retain too many controls under those types of trusts. An ordinary Revocable Living Trust is generally: revocable, freely amendable (you can make any changes to it that you want at any time), the beneficial interests in the trust are freely transferable (the beneficial interest in the trust can be sold, assigned, or transferred with little or no limitation), and the beneficiary can demand and force distributions of money or assets from the trust at any time. What happens if you get sued and end up with a personal judgment against you and you have a Revocable Living Trust is that the Judgment Creditor can run into court (when they discover that you have a Trust) and they can ask the court to allow them to execute against the assets held by the Revocable Living Trust. Essentially what happens in that case is that the judge will look at the Trust document that created the Trust in order to find out what powers you have under the Trust. If the Trust is revocable, freely amendable, the beneficial interest is transferrable and/or distributions from the Trust to the beneficiary can be demanded and forced by the beneficiary, the Court will simply order you to exercise any and all of the powers that you have in the Trust document in favor of the Judgment Creditor. The bottom line is that the Judgment Creditor may end up with everything that is held by the Revocable Living Trust and you end up losing it all.
TRUSTS THAT DO PROVIDE ASSET PROTECTION BENEFITSA Domestic Asset Protection Trust, in contrast, is designed (both by the law that the Trust is created under and by the Trust document that creates the Trust) so that you (while retaining as much power as possible) don't have any powers that a Court could order you to exercise in favor of any outside/third parties (aka a Judgment Creditor). The Domestic Asset Protection Trust laws generally fall under adopting state’s Spendthrift Trust statutes. Unlike traditional Spendthrift Trusts that were not designed as personal asset protection devices, the Domestic Asset Protection Trust laws are known as Self-Settled Spendthrift Trusts. Self-Settled Spendthrift Trusts are designed to provide the “Settlor” (the person that creates the trust) with maximum protection while enabling the Settlor to stay in control of the Trust. States that have, to date, adopted a Self-Settled Spendthrift Trust law (Domestic Asset Protection Trust law) are: Nevada, Alaska, Delaware, Rhode Island, Oklahoma and Utah. While the basic concept with these trust laws is the same, they do vary in some of the details and in how favorable they are to the person seeking the protection.
SUMMARY While Revocable Living Trusts are great estate planning tools, they do not provide any protection of the assets from a personal judgment creditors. For those who desire personal asset protection, a Self-Settled Spendthrift Trust (aka: Domestic Asset Protection Trust) can provide both estate planning and asset protection benefits while enabling the Settlor to stay in control of the Trust and the assets.
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