A revocable trust is a key document for many estate plans. It usually is drafted to give the person setting it up (called the settlor) full control by naming them trustee and beneficiary during their lifetime. It also addresses how the assets will be distributed at the settlor’s death. But many clients ask how this trust can protect them from the unexpected events of life. I am often asked, “Will this trust protect my assets if I get sued?”
The answer is no. A basic revocable trust does not provide creditor protection. Those concerned about liability outside the scope of an insurance policy (or the limits of the policy) should explore what an umbrella insurance policy might do for this fear. These policies provide extra insurance coverage and can soothe concerns about certain creditors pursuing assets.
Beyond an umbrella policy, there are tools to protect assets from creditors. But, asset protection planning goes beyond a basic estate plan. I have found that those concerned about future creditors usually aren’t ready to do the planning necessary to create a shield around their assets. Such a shield would involve an irrevocable trust that the settlor is not a beneficiary of. This means they give up their right to the assets. Another option is on the horizon. As of May 2015, Legislation is pending in Michigan on a type of trust that some states are already using. It is known as a self-settled asset protection trust. This trust is irrevocable and the person setting it up would be a beneficiary but cannot be the trustee. Until this trust is allowed in Michigan, a Michigan resident would need to establish the trust in a state that allows such trusts.
It is important to note that caution is necessary if asset protection planning is done while a person has known creditors. There are state laws on fraudulent conveyances when assets are transferred while a person knows of a creditor’s claim.