Anyone can use a trust to serve a number of financial goals. An individual can draft a trust to help the creator ensure beneficiaries use assets to fund higher levels of education or the management of properties. A creator can make a trust to help reduce their estate’s tax obligations or even avoid one’s financial obligations to creditors.
What types of trusts do people use to shield assets from creditors?
Although the details can vary the two most common types of trusts debtors use to shield their assets from creditors are a spendthrift trust or a domestic asset protection trust.
What is the difference between these two types of trusts?
The spendthrift trust is the more common vehicle of the two. This is an irrevocable trust, meaning the creator does not have control over the assets. The creator designs this trust to protect the assets from creditors. Although the details vary depending on the state, this type of trust generally differs from the domestic asset protection trust (DPAT) because it is set up to protect asset placed in trust for the creator’s loved ones — not the creator themselves.
The DPAT is less common because most states do not support the use of this type of trust. California generally does not recognize this type of trust. A creator generally funds a DPAT and then names themselves as beneficiaries in such a way that shields the assets from creditors. It is also an irrevocable trust, meaning the creator gives up control over the trust.
Because it is only allowed in handful of states, it is important to carefully review a claim that the debtor’s assets are protected within a DPAT.
Does the presence of a trust mean that the creditor cannot get the debtor to pay their bills?
A creditor can often establish a successful claim even in the presence of a trust if they can show that the debtor created the trust specifically to defraud the creditor. The exact process to reach the funds will vary depending on the trust structure. In order to understand the full implications of a specific trust, it is important to review the language used to create that trust. In some cases, a debtor may believe their assets are protected within a revocable trust. However, since these trusts generally still fall under the control of the debtor it is very likely that the creditor could still reach the funds.
These are just a few of the questions to review when attempting to get assets shielded by a trust. An attorney experienced in this area of the law can review the situation and provide guidance tailored to your case.