Revocable Trusts Provide NO Asset Protection by Design

The revocable trust is a strange bird: in preparing an asset protection plan we often speak of this type of trust as the foundation of the plan but the trust itself has no asset protection value for the grantor (trust creator). So why does this type of trust have such a pivotal role in the plan if it provides no protection to the grantor(s) from creditors?

The core concept underlying asset protection is that a judgment creditor readily “steps into the shoes” of the judgment debtor, and can thereby exercise the same control over assets owned by the debtor. This power includes the two most common controls; the power to sell property, and the power to withdraw funds from an account. In asset protection planning we seek to find legal ways to divide up control over assets among different entities such that the creditors of no single entity can gain control over the assets. The grantor of a trust retains the greatest power a trustee can have; the power to revoke the trust. Therefore, the grantor has full control over the assets and no protections from creditors through the trust.

Still, there are at least three reasons why individuals continue to use revocable trusts despite this limitation. First, the idea of giving up control over assets is generally incompatible with the grantor’s need to manage and make use of the assets during her lifetime. Second, nearly every state has adopted statute stripping so-called “self-settled” trusts of any asset protection powers by law. Third, revocable trusts can provide asset protection to non-grantor beneficiaries while providing tax savings and other benefits. The most consistent creditor for you and your estate is likely to be the Internal Revenue Service, and the revocable trust is a key component in a plan to minimize tax liability during and after your lifetime.

The revocable trust is the foundation of an estate plan that both minimizes tax liabilities and provides asset protection for the grantor and future beneficiaries. It sets the stage for how the estate assets are to be managed to maximize the production of the assets. Realistically, the need for more complex planning arises from the increase in the value of the estate. As the estate grows, other elements can be added that are tailored to fit specific needs. But for almost everyone, a revocable trust provides immediate value, regardless of net worth, and can lay the groundwork for the legacy you leave your heirs.

A well designed estate plan will draw on the strengths of a trust and other planning tools to protect the estate and preserve it for future generations. An experienced trust and estate planning attorney at Nielsen Law Group is available for a complimentary review of your estate planning goals, and to discuss the means available to achieve them. You can schedule your initial consultation by calling (480) 888-7111 or submitting a web request here.