Certain types of trusts can protect assets from lawsuits, which professionals at a higher risk of lawsuits commonly use. Revocable trusts, also called living trusts, cannot protect assets from a lawsuit because the trust creator still maintains property ownership in these arrangements. Irrevocable trusts, however, can protect assets from lawsuits. To ensure this type of trust protects assets, the trust must be drafted properly with the help of an attorney, and it must be associated with the appropriate jurisdiction. When choosing the trustee, we advise not selecting a spouse, close relative, or friend unless they have experience in this niche field. Instead, you need a professional trustee to serve as your right-hand man – or woman! But much more goes into answering the question: Can a trust protect assets from a lawsuit? We will break down everything you need to know about how a trust can protect your assets.
Can a Trust Protect Assets from a Lawsuit?
You can use an irrevocable trust to protect your assets from a lawsuit, but it’s important to understand a few things to better grasp whether you need an asset protection trust and how it can help. Read on to learn more about the risk of lawsuits, who needs this type of trust, and the ins and outs of how a trust can help you protect your assets in the event of a lawsuit.
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The Lawsuit Threat
Of course, the threat of a lawsuit probably weighs heavily on your mind if you are wondering, Can a trust protect assets from a lawsuit? After all, the United States is the most litigious country on the planet, so this is a very real risk that you face.
The nation has the highest number of lawyers, with roughly one lawyer for every 240 residents. The harsh reality is that for some professionals, lawsuits are basically a self-sustaining industry that thrives on even the smallest mistake. But we will get more into who this applies to below.
Think about it. How many commercials have you seen where lawyers are pushing their ability to file lawsuits and get “compensation” for minor injuries? You, like every American, have likely seen countless advertisements such as this.
When facing a lawsuit, creditors can go after your house, car, bank accounts, and other belongings to cover debts they think you owe. When directed at you, you could easily lose everything you’ve worked so hard to obtain over the course of your life through frivolous litigation.
This is a frightening prospect, but there is hope. With a properly drafted irrevocable trust, you can protect your life’s work to provide financial security for yourself and those you love the most.
Related Article: What’s the Difference Between a Revocable Trust and Irrevocable Trust?
Who Needs a Trust to Protect Assets from a Lawsuit?
Now, before we get into how you can use a trust to protect your assets from a lawsuit, let’s dive into whether or not you are the type of person who needs a trust like this.
Often, the people who can benefit the most from using a trust to safeguard their assets are doctors and physicians concerned about malpractice lawsuits, real estate developers worried about potential legal disputes, business owners with employees, business entities, or even lawyers.
But the truth is most high-net-worth people in high-profile, litigation-prone careers could also benefit. Let’s be honest – even being involved in an accident on your way to work could expose you to a lawsuit that jeopardizes your most valued possessions. This could happen to anyone.
Even if you do not have substantial assets but are at risk of losing your home or are facing mounting debts, this type of trust could be a huge asset.
There’s a theory in law called the “deep pockets” theory, which means that people will often go after those individuals or entities who are most able to pay, even if they have little to do with the circumstances surrounding the lawsuit.
So, now that you have determined that you could benefit from this type of trust, let’s dive into the nitty-gritty of the question, Can a trust protect assets from a lawsuit?
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Can a Trust Protect Assets from a Lawsuit? Yes, Here’s How.
As we have mentioned, you can use an irrevocable trust to protect assets from a lawsuit. These trusts are also called asset protection trusts. When a trust is irrevocable, you often cannot change it unless there are trust provisions that permit this. This limits flexibility.
When you transfer assets into a trust, you also forfeit ownership by proxy because you transfer that ownership to the trust, meaning you have no control over these assets. The trustee will then be responsible for overseeing and managing the assets the trust holds.
While this limits your control over these assets, this characteristic also limits the rights of debtors and creditors in the event of a civil lawsuit. This tradeoff is crucial to protecting your assets, and with a professional trustee, you can rest assured that your assets and legacy are in expert hands.
Some people even use offshore trusts to protect assets, which can help because to pursue the assets held in these trusts, creditors will have to litigate in the jurisdiction of that trust. This could deter them altogether. With these types of trusts, picking the right jurisdiction is key.
However, it’s important to keep in mind if a lawsuit is already in progress, you may not be able to use this type of trust to protect your assets. Further, in some states, it is possible for the person who sets up a trust to retain rights as a beneficiary of the trust and also receive asset protection.
California is not one of these states. California Probate Code Section 18200 states that if the settlor has the ability to revoke a trust or regain use of trust property as a beneficiary, they have full beneficial ownership and, as a result, can be subject to creditor requests to seize assets.
This means that in California, expert guidance is especially important to ensure you have a trust in place that will provide your assets and estate with the protection you deserve.
“It’s also important to understand that insurance is not enough. Many people believe that getting insurance will be sufficient protection when faced with a lawsuit, but when the circumstances are extraordinary, like if a former employee accuses you of a severe transgression, you will be hit by the stark reality that the policy you thought would protect your assets gave you a false sense of security.”
– Marcia L. Campbell, CPA & Professional Fiduciary
Always Work with a Professional Trustee to Set Up and Manage a Trust to Protect Assets from a Lawsuit.
So, can a trust protect assets from lawsuits? Yes, if you work with an attorney to draft a sound trust document and a professional trustee to manage your trust assets, you can use an irrevocable trust to protect your assets from a lawsuit. However, especially in California, it is of the utmost importance to get professional guidance to ensure that there are no gaps in this defense.
This guidance should entail hiring an attorney to help draft a trust document and hiring a professional trustee to oversee and manage your assets.
