Living Trust Assets Protected?

Are assets held in a living trust protected from creditors’ claims & remarriage? – By Kurt V Beasley

Generally speaking, when assets are held in a revocable trust, they are not protected from the legitimate claims of the trust maker’s creditors.

This is because the maker can revoke the trust and take back the trust property at any time. The law finds that it is inequitable to allow the trust maker to have this control and full use and benefit from the trust property while denying creditors the power to compel revocation in order to satisfy their just claims.

An irrevocable trust may provide some creditor protection because the maker is not able to revoke the trust and get the property back. The maker may have a beneficial interest in the trust, such as a right to income or to principal, and that interest may be reached by the maker’s creditors.

However, if the beneficial interest is subject to the discretion of the trustee and the maker is not the sole trustee, creditors can be thwarted. Since the contribution of property to an irrevocable trust is a completed gift, the property generally is outside the reach of the maker as well as his or her creditors.

 Can I protect my family trust from my spouse’s remarriage?

The terms of the trust can provide that on your spouse’s remarriage he or she is removed as a beneficiary of the family trust. It can also provide that on a subsequent divorce or on the death of the new spouse your spouse can again be taken care of by its terms. The appropriate language would be something like the following:

1. Distribute the income and principal to my surviving spouse and children, depending on who needs it.

2. If my surviving spouse dies or remarries, stop any distributions to my surviving spouse and distribute the income and principal among my children.

3. If my spouse becomes single again, go back to my instructions in number 1 above.