If you are starting a trust, one of your motivations may be to protect trust assets from creditor claims. You should know that creditors can access money in a trust in two different situations.
You Have a Revocable Trust or You Benefit from a Spendthrift Trust
When your trust is “revocable”, you have some control over the property that you place in trust, and you can change some parts of the trust. Creditors can reach the property in a revocable trust to satisfy your debts because you have access to that property.
In contrast, you give up all control over property you place in an “irrevocable” trust. Creditors cannot reach that property to satisfy your debts because you no longer own the property. The property is now legally owned by the trustee, in trust for the beneficiaries.
If you are the beneficiary of a “spendthrift” trust, creditors may be able to access some of the money in that trust to satisfy your debts. A spendthrift trust has language in the trust agreement saying that the trustee has full power to decide how distributions of money to the beneficiary will be spent. In other words, the beneficiary will receive benefit from the trust but cannot decide how he will benefit.
Creditors can access any money that is due and payable to the beneficiary from a spendthrift trust. That includes any money that has not yet been distributed but will soon, and any money the beneficiary has already received. The only exception is any money specifically designated for the beneficiary’s support or education.
You Start Moving Money into the Trust to Avoid Paying Debts
Sometimes, people start moving their personal money and property into a trust because they know they have to pay debts. California has very strict laws prohibiting fraudulent transfers – transfers intended to avoid paying creditors. Moving assets into a trust so they are no longer titled in your name, if you know you owe debts or will soon owe debts, could be illegal. Creditors could access those assets to pay bills.
If you plan to move some money into a trust and you know of a court judgment against you, overdue bills, or similar, talk to a lawyer before you do anything. You need to know your rights and understand the consequences of putting money in a trust.
Planning your estate? Angela Klenk, Esq. and the team at Beach Cities Estate Law couple personalized attention to your estate plan with big law firm experience for a winning combination to give you peace of mind. To schedule a case evaluation, visit Beach Cities Estate Law online or call Angela’s office at (424) 400-2125.