A Revocable Trust Does Not Avoid Creditors

A Revocable Trust Does Not Avoid Creditors

Some people wish to place their assets beyond the reach of their creditors. A revocable trust will not accomplish this result. The creator of a revocable trust retains all rights in the assets that he or she transfers into the trust and his or her creditors will be able to reach those assets in the same manner as the creator could have.

In some communities, it is common to put assets into the name of someone else to avoid creditors. First, one runs the risk of having the person you gave your assets to run off with them or deny that there is an obligation to give them back. Second, the creditors of the person to whom you gave your assets may try to reach them. Third, the person who you gave your assets to may die and give them to someone who will not return them to you. Fourth, and most important, your creditors will argue that transferring assets to someone who is supposed to hold them for you is really a form of fraud, and that any such transaction should be undone/reversed by a court.

Often, people fail to obtain a reasonable amount of liability insurance to protect themselves against the risks that they are incurring. For example, for home and automobile, an umbrella policy should be obtained. If one has  rental properties, separate policies should be obtained for each property.

Businesses and income producing real properties can be owned by separte corporations or limited liability companys. It is a mistake to have more than one business or more than one real property owned by the same entity because if that is done, the liabilities of one property will ‘infect’ all the other assets owned by that entity.

If a business or a piece of real estate is owned by a corporation or limited liability company, that does not mean that there is no need for liability or other relevant insurance. The equity of the business or of the real property itself is exposed to the creditors of that business or property, and insurance is necessary to protect that equity.


About randyspiro

I am a super lawyer in California with dual specialization in Estate Planning and Taxation.
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