Does a Revocable Trust Protect You From Liability?
As you approach retirement, you may find yourself looking into ways to protect your legacy and hard-earned wealth from creditors, excessive taxes, and other avoidable expenses.
One way to go around this problem is to set up a revocable trust, also known as a living trust.
Does a revocable trust protect you from liability? While revocable trusts don’t provide asset protection against liability risks or lawsuits during your lifetime, they can protect your assets after you pass away.
Read on to learn how revocable trusts work and whether they are right for you.
Do I Need a Will or Trust?
Wills and trusts are two types of estate planning documents. Both have their pros and cons, and which one would be a better fit depends on your goals and needs.
A will contains direct instructions for:
- The recipients of specific assets after your death
- Appointment of guardians for minor children
- Other final arrangements
The main drawback of wills is that they often require your estate to go through probate — a legal process in which a special probate court authenticates the validity of your will and oversees the distribution of your assets. Probate can be expensive and time consuming.
Trusts also contain directions for asset distribution upon your death or incapacitation. Unlike wills, however, trusts allow trustees to distribute assets without court approval.
What Is a Revocable Trust?
A revocable trust allows you to place assets into a trust during your lifetime. You (the grantor) transfer ownership of your property to the trust, which is administered by a trustee for the benefit of a beneficiary. The grantor, trustee, and beneficiary may be different parties or the same person — you.
Since you retain full control over the assets and can amend or revoke the trust at any time, these types of trust are called “revocable.” They are also known as “living” trusts because — unlike wills — they take effect during your lifetime.
When you pass away or become incapacitated, a successor trustee you named in the trust agreement will take over trust management and asset distribution.
Trusts are popular estate planning tools, but they aren’t for everyone. An experienced Michigan estate planning attorney can advise you whether a will or trust would be a better fit for you.
How Can a Revocable Trust Protect You From Liability?
Now that you know how revocable trusts work, let’s answer the question, “Does a revocable trust protect you from liability?” The answer — as you can probably tell by now — is a qualified “maybe” (you know lawyers often have a hard time with absolutes.)
Revocable trusts don’t offer liability protection during your lifetime. Since you can always unwind or change the terms of the trust, creditors can ask the court to order you to do this.
However, revocable trusts can offer a protection from liabilities owed by a beneficiary of the trust, after your (the original owner/grantor’s) death or incapacity. Your trust can limit or prevent creditors of a trust beneficiary from accessing the assets designated for the benefit of the beneficiary. With regard to your debt, your revocable trust will likely be required to satisfy debt owed by you, upon your death, prior to any distributions to beneficiaries. While there are exceptions to this requirement, this is the normal course of action. Generally, then, revocable trusts do not shield your assets from your own creditor liability.
What Are Some Other Benefits of Creating a Revocable Trust?
We already mentioned that trust assets can avoid the expensive and time-consuming probate process. This not only saves time and money but also allows your beneficiaries to access their inheritance right away. This allows you to provide for minor children, adults with special needs, and other beneficiaries without having to go through probate court proceedings.
Additionally, revocable trusts help reduce the taxes associated with transferring your assets after death. A professional third-party trustee can also provide more efficient management of your assets, both during your lifetime and after you become incapacitated or pass away.
Michigan Estate Planning Attorney | Schedule a Consultation
Estate planning does need to be overwhelming with the right partner at your side.
At The TGQ Law Firm, we are an estate planning law firm in Ann Arbor, MI here to help you with every step of the process. Our team of experienced and compassionate attorneys can handle all aspects of your estate plan and answer questions such as, “Does a revocable trust protect you from liability?”
We’ll analyze your financial and family situation and help you create the right estate plan for your needs. Call 734-707-3232 or contact us online to schedule your free consultation.
Disclaimer: This article is not intended to be legal advice. Everyone’s situation is different and legal advice is only properly given after having reviewed your specific situation.
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