Can A Trust Shield Money From Creditors?

For a trust to shield assets from creditors, you need two things:

1. The trust must be irrevocable
2. You cannot have any existing creditors
   

An “irrevocable” trust means you can’t take it back. Once it’s created, it is irrevocable, just like it sounds. Once you establish the trust, new creditors won’t be able to go after any money you put into it. (Neither will Medicaid if you do it within the 5-year lookback period.)

Oncce the money is in the trust, you may still be able to access distributions, which can go to yourself. However – creditors can reach that.

So essentially if you want an irrevocable trust, you really need to be set on never touching or using the money you put into the trust if you’re seriously worried about unknown creditors.

Existing creditors now, can go after your trust if you put money into it. Even if it’s irrevocable.

Better options

If you’re worried about existing debt now, there are options, such as bankruptcy. It might not be glamorous but it erases your debt, tanks your credit, but lets you keep your home.

But lets assume you’re worried about creditors to come.

There are better options than getting an irrevocable trust to avoid unknown creditors.

First, ask yourself… who am I worried about suing me?

Maybe you’re self employed and you’re worried about being sued over negligence in your business. Maybe you’re an individual and you’re worried you’ll cause a horrible car accident and someone will sue you and take all of your money… etc etc.

If you’re self employed and worried about lawsuits, establish an “LLC” – Limited Liability Company – that will protect you from personal creditors and will protect you from lawsuits directed at your business. Typically, unless there’s a showing of fraud, people can’t come after your personal assets separate from the assets your LLC owns. – Secondly, if you have office space, get premise laibility insurance, and see if there are other insurance offerings that are standard in your line of work.

Most people get sued for accidents. If you’re an individual worried about this – beef up your auto insurance. They will cover you if you’re at fault. Have good health insurance so hospitals don’t sue you if you need an emergency procedure and can’t pay for it, etc…

Insurance and practicality

Having good insurance is key to avoid creditors or getting sued if you’re an individual or business owner.

A lot of people’s fears are unfounded – think about this practically.

I had a lady who owned an Airbnb as an LLC, had premise liability insurance of $1,000,000 (which cost her $500/yr), and wanted a trust to shield assets from potential tenants who slipped and fell.

Practically speaking, someone would have to slip and fall and cause themselves $1m in damages to spend through her insurance policy. That number is astronomical and would probably be due to a freak accident. For a slip and fall to cause $1m in damages you’d need to be seriously disfigured or paralyzed. Most cases, people may break a bone or sprain an ankle. Those medical bills will not reach $1m

Then, since she has an LLC that owns one house… the alternative is that the plaintiff would go after the house her LLC owns. However, the house was only worth $300k… if someone really got into a serious accident, they’d take whatever the $1m insurance policy would offer.

Connecticut Domestic Asset Protection Trust

CT recently passed a law that allows you to shield assets from creditors through a domestic asset protection trust (DAPT), while still allowing you to make certain distributions for credit card bills, family needs, and your mortgage. However, DAPTs don’t protect you against medicaid, or child support. Furthermore, anything distributions that the creditor feels are not allowed under the law, can be garnished as income to you.

Ultimately, we all should maintian good insurance, and an irrevocable trust to avoid unknown creditors should be thoroughly considered after exploring your other options.