Today’s post comes from Los Angeles area bankruptcy lawyer Mark Markus.
The Revocable Living Trust.
Everyone’s got one, but few can tell you what it does for them.
And those who can tell you, often have it wrong.
People create these trusts, stick their home, bank accounts, and other assets in them and move on.
Trusts avoid probate
The main, if not only, purpose of such a trust is to avoid probate, so that when the trust holder (grantor/settlor) passes away, the property can go to their beneficiaries without probate.
You may even have one of these trusts yourself, or I bet you know someone who does.
So let me ask you this: Do you think having your assets in a living trust protects those assets?
Living Trusts Do Not Protect Assets
Unfortunately, while the settlor is alive, the Trust offers no protection whatever from the settlor’s creditors.
There is no legal difference between the Trust and the individual who created the trust. Thus, if a creditor sues you and gets a judgment, they can seek to collect from any assets you have, including whatever assets are in your living trust.
What is particularly disturbing to me is the number of people who tell me that they thought it did protect them, and many times they were told this by the “attorney” who created the trust for them!
“But the property isn’t even in my name…it’s in the name of the trust,” they tell me hopefully.
Nope. Sorry. That doesn’t change what is and isn’t protected.
All is not lost, perhaps, because each state offers protections for value in certain assets, and those exemptions extend to whatever assets are in the Trust.
So, for example, if you are entitled to a $100,000 homestead exemption under California law and your home has $80,000 of equity and is titled in the name of your trust, it will still be protected by your homestead exemption.
Trust transparent in bankruptcy
In bankruptcy, a living trust is treated the same as it would be outside of bankruptcy. In other words, there is no difference.
Depending on which bankruptcy chapter is filed, and what exemptions you have, your assets–even if in a Living Trust–may be at risk.
The only way to know is to consult with an experienced bankruptcy attorney. Read more on exemptions in bankruptcy.
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