This is a common misconception in the estate community. The idea that by putting your assets into a revocable trust, you are creating a shield against creditors, lawsuits, and other liabilities or harms that may come your way. That magically—- just because you have a revocable trust, all of your past, present and future problems disappear.

Before jumping into WHY this is a misconception, it is best to understand what a revocable trust is.

 

A Revocable Trust is an entity that holds a person’s assets. It is created with the main goal of avoiding probate court and optimizing estate tax liabilities. It is amendable and revocable, meaning the creator of the trust maintains total control over the trust during their lifetime.  The word ‘control’ is important here. You retain the rights of ownership to the assets in the trust, without restrictions.

Control is in the hands of the creator. Why is it important that you have control and how does this impact you during a lawsuits?

Because you are maintaining control over your assets, this also means your creditors can get to the assets as well. It is important to understand that the assets you own are subject to your problems in life. If you own real estate, your creditors or judgment holders can access what you own. If you own an asset, you maintain control over the asset and have all the legal rights over how to manage, sell, incumber, etc that assets. So, if the trust assets are still within your control because the trust is revocable, then your creditors can get to those assets as well.

The court treats assets held in revocable trust as the same as being in your name. In fact, it normally uses the creator’s social security number as its tax identification number for IRS purposes.

In order to obtain creditor protection, the trust must be irrevocable in addition to other requirements.

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