Do Trusts Protect From Creditors?

Trusts are useful estate planning tools. One of the best things about them is that they can be used to protect your assets from unwanted/unintended beneficiaries, estate taxes, and more. That way, you can leave your assets to your intended friends and loved ones. But what about creditors trying to collect a debt? Trusts have a complicated relationship with debt and creditors, and the trust attorneys at The Law Offices of Diron Rutty, LLC can explain.

If you need help creating a trust and learning exactly what and who it protects against in the Bronx and White Plains, New York, our estate planning attorneys can help.

What Does a Trust Do?

A trust is an arrangement that gives a third party – also known as a trustee – the ability to hold assets on behalf of designated beneficiaries. Beneficiaries can be you, loved ones, or even organizations such as charities. You can organize them to receive their assets after you pass away or when specific conditions are fulfilled. They can help:

  • Maintain control of your wealth: If you do not have a will, the state will divide your wealth amongst your family and themselves. A trust helps secure your wealth.
  • Avoid the probate process: Even if you have a will, the state will interpret it, rather than follow it word for word if they can. This means certain assets may go to unintended parties or the state if you only use a will.
  • Minimize your taxes: Probate court is also where the government will take portions of your estate to pay estate taxes or charge your beneficiaries a tax on the value of the assets you leave them. Trusts avoid this.
  • Plan for incapacitation: Trusts are not only for after you pass away. If you become incapacitated or are unable to make decisions, a trust can protect and handle your assets. They can even designate a power of attorney(s) who can make financial and/or health decisions for you.
  • Donate to charities: Trusts do not have to pass your assets down to people. You can pass your assets and wealth to charities that you value.

What are Debt Creditors?

If you owe a person or entity money, whether it be a private loan organization or a bank, there are debt creditors who can make a claim in court on your assets. This means that your assets will be used to pay off your debt directly, or sold to do so. If you are a business owner, you can have special debts on your business that debt creditors can claim against your business upon your death. Types of debt creditors include:

  • Banks
  • Credit card companies
  • Mortgage lenders
  • Suppliers (for business owners)
  • Bondholders (for business owners)

Can Trusts Protect Your Assets Against Debt Creditors?

Whether or not a trust can protect your assets against debt creditors depends wholly on what type of trust you use and what type of debt you have.

Trusts that Cannot Protect Against Creditors

Revocable living trusts are the only trusts that cannot protect against creditors but are also the most common. With these trusts, you can access the assets in them at any time, and because of this, courts see the trust’s assets as your assets, meaning that creditors can utilize these assets to pay your debts to them.

Trusts that Can Protect Against Creditors

  • Revocable Trusts: This may sound confusing, but after you pass away and no longer have access to this trust, its holdings are no longer a part of your assets. This means that creditors cannot try to access any assets you left in this trust for someone else after you pass away. Depending on how you designed this trust, it may not be considered a revocable trust after you pass away.
  • Irrevocable Trusts: These trusts cannot be accessed at all, and the assets are not dispersed among your beneficiaries until after you pass away. Because you cannot access them, they cannot be considered your assets, and thus are not something creditors can use to pay off your debts to them.
  • Spendthrift Trusts: These are similar to irrevocable trusts in that you can’t access them, but you can make it so that the beneficiary can access the assets in the trust before you pass away. Because debts do not pass on to anyone other than a spouse, creditors cannot demand payment through assets gifted to your beneficiaries.
  • Discretionary Trusts: With these trusts, you are locking assets away from yourself, meaning they no longer belong to you. For added protection against creditors, your beneficiary can’t access the assets unless they meet certain requirements. Whether they can complete this before you pass away or not, creditors have less access to the assets than you.

Contact the Estate Planning Attorneys at The Law Offices of Diron Rutty, LLC for Help

If you have significant debts that you need to protect from creditors, a trust can help. Many types of trusts can protect your assets from debt creditors. Some work better for your needs than others, and they only work when made with precision.

For the experience you need, contact the trust lawyers at The Law Offices of Diron Rutty, LLC. Our law firm can help you create a trust that will protect your assets, and ensure only your beneficiaries receive them.

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