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Can My Revocable Living Trust Shield My Assets From Creditors?

A revocable living trust is a very useful estate planning tool that can help your beneficiaries avoid the expense and inconvenience of probate. Essentially, a grantor creates a legal document that authorizes the trustee to hold legal title to and manage his or her assets. Often, the grantor is the trustee of his or her own trust while alive and can do whatever he or she wants with any of the assets. Upon death, a successor trustee takes over and distributes the assets of the trust according to the grantor's written wishes. The secret to avoiding probate is that the grantor's assets are owned by the trust, so they are not considered part of the grantor's "estate". In many ways, this revocable trust is simply the alter ego of the grantor.

If someone transfers all of their assets to a trust, does that shield them from the reach of creditors? If Mr. X owed $10,000 of credit card debt before his death, then is the credit card company barred from recovering the balance from the Revocable Trust of Mr. X?

The answer is no. A revocable trust does not shield the grantor's assets from his debts for the very reason that the trust is revocable. The grantor retains total control over the assets in the trust and the terms thereof, including the power to modify or even terminate the trust outright. As long as the trust is revocable, then the assets contained therein can always be recalled to the control of the grantor. For this reason, Michigan's Estates and Protected Individuals Code provides that any trust of the decedent that was revocable at the time of death of subject to "an enforceable and timely presented claim of a creditor to the settlor, including a claim for the settlor's funeral and building expenses" to the extent that the decedent's estate is insufficient to pay them off. MCL 700.7605(1)(b).

Not only does the trustee of the revocable trust have to manage claims presented, but he or she will also have the duty (if there are no estate proceedings) to publish and serve notice to creditors in the same that a personal representative would be required to. MCL 700.7608. After the trustee provides notice in an adequate publication, then any creditors have up to 4 months after the date of publication to present a claim to the trustee or else the claim is barred forever. MCL 700.7610(1)(a). If a creditor is known to the trustee, then the trustee will have a duty to send direct notice that known creditor either within the 4-month period or within 28 days of sending notice to that creditor, whichever is later. MCL 700.7610(1)(b). Failure to send a direct notice to a known creditor may extend the statute of limitations for that creditor to file a claim against the trust. If a creditor does submit a claim, then the trustee must decide whether or not to allow or disallow the claim. The trustee, if denying the claim, must send a notice of whole or partial disallowance to the claimant within 63 days after the time for the claim's presentation has expired, or else the claim will be considered allowed. MCL 700.7611(a). If disallowed, the claimant has 63 days after the mailing of the notice of disallowance to commence a court proceeding against the trustee or else the claim is barred forever. MCL 700.7611(a).

If a grantor was interested in shielding assets from creditors, then he or she may create and transfer property to an irrevocable trust. Unlike a revocable trust, the grantor is barred from modifying, amending or terminating any of the terms of the irrevocable trust unless he or she has permission from all beneficiaries. Furthermore, a grantor effectively transfers ALL ownership interest of assets into the irrevocable trust, meaning that they are beyond his or her ability to recall. While this mechanism may provide creditor protection, it does prevent the grantor from changing his wishes or controlling the disposition of trust property in the future.

Revocable trusts may not protect your property from debt collection, but they have other benefits under the law. If properly funded, they can help your beneficiaries avoid the need for probate proceedings for the distribution of your property after death. This can save money otherwise spent on filing fees or the inventory fee, and the disposition of trust assets can occur much faster than in the probate court. Grantors will also enjoy the privacy associated with their personal business not being a matter of public record. Finally, grantors can draft trusts in a way to accommodate more sophisticated wishes than a last will and testament. For example, a trust can hold money for a beneficiary to be paid only upon certain contingent conditions such as graduating college, getting married or simply reaching a certain age.

Whether or not a revocable living trust (or even an irrevocable living trust) is the best option for your particular situation can be accurately determined after consultation with a skilled estate planning lawyer. If you have any questions about trusts or estates, do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC today.

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