Is My Trust Protected if the Trustee Gets Sued for My Debts?
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Question:
If I have an irrevocable trust and my trustee gets sued can my creditors attach my trust?
Response:
Probably not, but it depends on the trust and what you mean by “have.” If you are the beneficiary of a trust that someone else created for your benefit, probably it’s protected from your creditors, but it depends on how the trust is written.
If it’s an irrevocable trust that you created, it depends on two factors. First, did the debts exist when you created the trust? Second, what are your rights under the trust? You cannot create a trust that protects your assets from debts existing at the time of its creation. This is known as the “fraudulent conveyance.” If, on the other hand, the debts arose after creation of the trust, in most states the trust funds are available to your creditors to the extent they’re available to you. So, if the trustee might distribute principal to or for your benefit, it will not be protected from your creditors.
If you do not already have an irrevocable trust but, instead, are thinking of creating one, the same rules apply. It would provide no protection from your current creditors and only protection from your future ones if you had no right to distributions of principal. An exception to this rule are so-called domestic asset protection trusts or “DAPTs.” A number of states now do permit you to transfer assets into trusts that are protected from your future debts — still not current ones — and be a beneficiary of the trusts. These trusts require that you have a bank in the state acting as a trustee or co-trustee. You can learn more about them here.
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