One advantage of a trust that is not mentioned enough is a trust's ability to prevent, at least in part, creditors from reaching someone's assets. It is important in estate planning, however, to create the right type of trust because only a few types of trusts are exempt from creditors.
One type of trust that cannot typically be reached by creditors is a "non-self-settled trust." Typically, estate planners suggest this type of trust to a client who is interested in transferring the benefit of an inheritance to their children without also transferring legal title to the inheritance. The trust assets are irrevocably placed into the trust for the benefit of the children, who act as beneficiaries. Creditors are often unable to access the trust assets in order to pay off the trustor's debts.
A "self-settled trust," however, does not usually prevent creditors from reaching trust assets in order to pay off a trustor's debts. In a self-settled trust, the trustor is also the beneficiary of the trust. In reasoning that creditors are able to reach the trust's assets, courts look to substance over form. The argument goes that it is not fair for an individual to evade creditors merely by setting up a trust and naming himself as beneficiary of the trust. Similarly, in certain situations the act of gifting substantial assets to a third party in order to evade creditors will not prevent creditors from reaching those assets. By claiming "fraudulent transfer" of assets, creditors are able to reverse such gifting transactions and obtain the assets originally gifted.
There are a number of different estate planning and asset protection tools available, each tailored to achieve different goals. Understanding the characteristics of each type of trust available, therefore, is vital to choosing the correct and most appropriate type of trust.
Source: Enumclaw Patch, "Can They Take My Retirement? Basic Asset Protection Explained," Owen Gabrielson, July 17, 2012
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