Revocable Living Trusts and Asset Protection
A revocable living trust is created when a person transfers her property into a trust throughout the course of her lifetime. The term “revocable” means that the trust can be changed at any time.
A lot of people think that if they put their property into a revocable living trust, that the property will then be safe from creditors, divorce settlements, bankruptcy, taxes, etc. Unfortunately this is a common misconception and the opposite is true: property is not magically sealed off from the world when it is transferred to a revocable living trust. What this means is that if the person creating the trust becomes financially responsible for something in the future, then his/her creditor can go after the trust property to collect upon what is owed.
Thus, while revocable living trusts do provide many important benefits, broad asset protection is not one of them. Many other options exist, however, for those who seek to protect and maintain their assets. Some of these options are quite simple. One such option is to purchase good insurance – carry higher limits on your car insurance, obtain an umbrella policy, get valuable property insured and maintain excellent health insurance. If you own a business (especially if it’s a high-risk business) set up the appropriate corporate entity to limit your liability.
Divorce, taxes, liens and bankruptcy are a little trickier but, unlike the above scenarios, you have control over these problems. Get a pre-nuptial agreement and don’t marry someone with red flags. Conservatively invest. Don’t spend money you don’t have and avoid racking up credit card bills that you cannot repay at the end of every month if need be.
Unanticipated issues will always arise. By acting with awareness and an abundance of caution, however, you can definitely make moves to limit your chances of liability and preserve your assets for the future.