Older couple discusses potential trusts

Two Types of Trusts: Which Provides Better Protection Against Creditors?

If you are considering putting your assets in a trust, you may wonder which type of trust can best safeguard your assets against creditors. While there are many types of trusts, the two most common trust forms are “revocable” and “irrevocable” trusts. Our California trust attorney can help you determine which type of trust best suits your needs and goals.    

What Is a Revocable Trust?

A revocable trust is a legal entity where you can place your assets while you are alive and maintain some control over them. The beneficiaries of a revocable trust do not have access to the assets of a trust until your passing. This is a common type of estate planning tool because it takes assets out of the probate process and lets you pre-determine what happens to them when you die.

The creator of a trust can also be its trustee and manage the assets. A person can change the beneficiaries, remove or add property to the trust or even sell or gift trust property. You will name yourself the trustee when you create a typical revocable living trust to avoid probate.

Because of a person’s retained control over the assets of a revocable trust, this is not a way for you to shield assets from your creditors. In addition, income or wealth generated by the revocable trust counts as personal income, and you will be responsible for any taxes. This can be good in some scenarios, as individual income tax rates are usually lower than trust income tax rates for comparable income brackets. But, for others, the tax consequences may be more significant.

What Is an Irrevocable Trust? 

An irrevocable trust is a legal entity that can also be created during a person’s lifetime and be used for estate planning purposes to avoid probate. However, once a person transfers property or assets to an irrevocable trust, they cannot reverse this decision, and the property is no longer within that person’s control. In many scenarios, the person who funds or creates the trust will also be unable to make decisions related to the trust. 

However, the creator will have the right to choose the trustee of the trust when it is created. While this person cannot be the trust creator, it can be someone you trust. This is a serious decision requiring much thought, as getting the trustee changed or removed is not always so simple.

Some significant benefits of an irrevocable trust are that it can be a great way to limit estate taxes or protect assets from creditors. These creditors include ordinary creditors and others, such as the state of California’s Medicaid program, also known as Medi-Cal. An irrevocable trust may be a good choice for persons who are aging and facing the possibility of needing Medi-Cal to pay for their long-term care, persons who are subject to increased professional liability, or beneficiaries who have special needs or disabilities and want to avoid becoming ineligible for government benefits.

Types of Trusts

Many types of trusts may be available to you. Some irrevocable options that may fulfill a person’s goals of shielding assets from creditors include the following:

  • Special Needs Trusts (sometimes identified as Supplemental Needs Trusts)
  • Irrevocable Life insurance trust
  • Qualified Personal Residence Trust
  • Grantor Retained Trust

This is only a partial list of all the options for trusts that may be available to you. Forming a trust is a serious undertaking and should only be done after consulting with an experienced attorney.

Consult With an Attorney

If you are considering creating a trust to protect your assets from creditors, our attorney is here to help. The California Trust Law is complex and can be confusing. We offer a free initial consultation and a personalized estate and trust planning approach. Contact us today.