The Truth About Living Trusts

February 21, 2019

I had an appointment last night with a young couple, we were doing some insurance planning. During the course of the conversation, the strategy that I recommended offered protection against getting sued, creditors and bankruptcy. The husband said, “we are already good on this, because we have our house in our living trust, and my friend told me that we were protected against something like this.

Frankly, I have heard this many times before, so I explained to the couple that I believed the information was inaccurate.

The main purpose of putting your home in a living trust is to avoid the lengthy and expensive process involved with probate. Probate can run as much as 3 to 6% of your estate’s value and can take months, even a year to settle. Additionally, a trust can help to keep the estate settling process to be private, can get property or assets in multiple states under one place of administration to avoid opening probate in all of those states, and lay out your plans to pass assets to loved ones, minor children, and so on more efficiently.  

However, a revocable living trust simply removes your home from probate, it doesn’t avoid creditors, taxes, etc., because you still own the rights to your home and you can access that trust anytime. This means that it can be liquidated to resolve debts from bankruptcy and liabilities from litigation.

If you have your home in an “irrevocable trust,” then this provides a much tighter asset protection technique. Another option is creating a QPRT, Qualified Personal Residence Trust, which can be irrevocable and still transfers your home from your ownership.  However, you can get to still live and use your home as you laid out in the trust agreement. This provides a good alternative to protect against creditors and judgments.

Finally, declaring Chapter 13, not 7, can provide creditor protection, because you aren’t required to liquidate all your assets to settle debts or obligations, rather these things are paid for every month by a court-appointed trustee out of your disposable monthly income. That person then pays it out to the various creditors. Chapter 7 is where the trustee takes control of your assets and sells them to raise money to pay off your recognized debts.

It’s important to remember that I’m not a lawyer, so consulting an attorney, or an experienced expert in these areas is the best recommendation that I can make!

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