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Does an irrevocable trust protect assets from creditors?

A trust can be useful in a variety of estate planning situations. But before a person decides to set up a trust and sign over assets to it, they should understand exactly what a trust can accomplish, as well as a trust's limitations. For example, can a trust shield a person's assets from their creditors?

An irrevocable trust can protect assets from some creditor's claims. In general, once a person deposits assets into an irrevocable trust, the assets no longer belong to that person. Rather, the assets belong to the trust, and will ultimately be passed to the trust's beneficiaries. Thus, if a creditor files claims against the person who set up the trust, the creditor generally cannot satisfy those claims by seizing the assets in the irrevocable trust. There are exceptions to this general rule, however.

If the trust itself does something wrong, another person can sue the trust and gain access to its assets. For example, if the trustee invests some of the irrevocable trust's assets in a business deal that goes bad, other parties to the deal could potentially seek legal recourse against the trust. Also, if a person transfers assets to an irrevocable trust in a bad faith effort to avoid creditors, a court could rule that the assets can be used to satisfy creditor's claims.

An irrevocable trust can be a valuable tool in protecting certain assets from creditor's claims against an individual. The effective use of these trusts requires adhering to the applicable trust laws, as well as proper trust administration. People in Polk County who are looking for ways to protect their assets may want to reach out to an estate administration attorney about using an irrevocable trust.

Source: Zacks Investment Research, "Can an Irrevocable Trust Be Sued?," Steve Lander, accessed on Feb. 2, 2016

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