The key to effective estate planning is determining what your specific needs are and tailoring your plan to meet those needs. If you do not know what different components of a plan can do for you, it can be helpful to consult with an experienced estate planning professional.
For example, some people mistakenly believe that a living trust protects your assets from creditors in the event that you incur significant debt. For example, if you experienced a serious illness or injury, the hospital might charge you catastrophic medical bills. In that instance, a living trust would not protect you from collection actions or lawsuits by the hospital.
Why Living Trusts Do Not Protect Assets
When you create a living trust, you are both the grantor and the trustee. This gives you control over the assets as long as you are still alive and allows you to use them as you wish. However, it also means that you are still the owner from a legal point of view. Because the assets are still in your possession, that makes them fair game for creditors.
Most living trusts are also revocable. In other words, you can modify them or cancel them whenever you want. If you cancel the trust, the assets revert back to you. Because you still have access to the property, a living trust does not provide asset protection.
If your goal in creating a trust is to protect assets, a living trust may not be the right choice. However, there are other trusts that do provide asset protection. These are usually irrevocable trusts. You appoint a trustee to control and manage this type of trust, and it becomes a separate, tax-paying entity. Since the assets are no longer in your name, creditors cannot touch them.
What Living Trusts Can Do
Living trusts can be appropriate in situations other than asset protection. For example, if your goal is to help your survivors avoid the probate process, a living trust can be very effective. It can allow you to pass on your property to your family members or named beneficiaries without having to wait for the approval of the probate court. A living trust also allows you to name a successor trustee who can manage your assets in the event that you become incapacitated.
Estate planning is not a one-size-fits-all undertaking. What works for your friends and neighbors may not work for you. One of our estate planning attorneys, like an estate planning lawyer in Philadelphia, PA, can assess your unique needs and help you design a plan that meets them. Contact our office to arrange a consultation.
Thank you to Klenk Law for their insight into asset protection planning.