Revocable Living Trust as a Creditor Shield?

Are you planning to create a Trust to avoid current or future creditors? Please proceed with caution, with an understanding that it probably will not work out the way you would like it to.

During conversations covering Trust-owned property, an idea gets thrown my way almost every time that “if I have a Trust, then my creditors will not be able to take my assets.”

The idea follows this line of thinking:  if the Trust owns the property, then you don’t own the property as an individual and a creditor can’t get to those assets because you don’t own the property, the Trust does. Seems simple. Asset protection.

Here is the flaw to that thought: the most widely used Trust is a revocable Trust, which does not provide that type of protection. The point of being revocable allows you have the power to add and subtract assets from the Trust’s ownership, amend the Trust, terminate the Trust, etc. So, really, from a public policy perspective, you still own the assets that are held by the Trust.

Even if you created one of the Trusts that allows you to avoid creditors’ claims, you still aren’t guaranteed to be judgment proof if a judge determines that the purpose behind this transfer was fraudulent, see Idaho’s and the Federal Fraudulent Transfers Act, or if the transfer to Trust was done within a statutory time limit called a “look-back.”

This does not mean that you will lose everything if a creditor comes after you.

Idaho does have a law called the Homestead Exemption, which allows for up to $100,000 in equity in the home you own to be free from attachment by a creditor. Additionally, a few other items of personal property are exempt up to certain dollar limits.

Without getting too far into the weeds, there are other asset protection strategies out there, i.e. using the exemptions, certain types of Trusts for specific and narrow purposes, “equity stripping”, LLCs, Limited Partnerships, Family Limited Partnerships, and good old-fashioned Prenuptial and Post Nuptial Agreements (a divorcing spouse can be a “creditor” as well).

In the end, there is a plethora of reasons to create a Trust, but protecting assets from creditors is not one of them.

If you have questions, concerns, or would like to find out how to create your Trust-based estate plan, call Justin Jeppesen at 208-562-4891 or email jjeppesen@parsonsbehle.com.