A trust can protect your assets for the next generation. However, if you have debt, the trust will not necessarily protect assets from creditors. If you or your beneficiaries file for bankruptcy, for example, the trust could be seized for repayment of debts.
Understanding the Differences Between a Revocable and Irrevocable Trust
When either the grantor or the beneficiaries of a trust have debt, this highlights the distinction between a revocable trust and an irrevocable trust. If you are the grantor, because you are in control of a revocable trust until you die, assets in this type of trust will legally be considered your property during your lifetime. Your beneficiaries will assume ownership of the trust once you pass away.
An irrevocable trust is when you’re not in control of the trust. Although the beneficiaries of an irrevocable trust don’t necessarily have access to funds in the trust as soon as it is created, they are legally considered the owners of the assets in the trust. You could add a “spendthrift” provision to an irrevocable trust, which could protect the trust from creditor seizure if your beneficiary files for bankruptcy. In some circumstances, a trust may also be eligible to be exempt from seizure during bankruptcy.
Benefits of Trusts
There are different reasons to choose a revocable or irrevocable trust, but it’s important to choose wisely. Some of the benefits of an irrevocable trust include:
- Estate tax reduction
- Asset protection
- Charitable estate planning
On the other hand, you may choose to have a revocable trust for the following reasons:
- Planning for mental disability
- Avoiding probate
- Protecting privacy
If you are creating an estate plan, you may be concerned about how your debts could affect any trusts you would want to create. A TuckerAllen estate planning attorney can recommend the types of trusts that would be best suited for your family.