Yes. No. Maybe. Kinda. Sorta. Some types of trusts can protect your assets from creditors and some do not. The general rule to remember is if you control your assets and have access to them, then your creditors can get to them.
A Living Trust, also known as a Revocable Trust, is not designed to give you protection from creditors. If you have a Living Trust then you are probably in charge of it, it is for your benefit and you can amend it or revoke it at any time. That means your creditors can come after the assets in the trust just like if the assets where owned by you as a person.
If you have an Irrevocable Trust that you are not in charge of and can’t force the person in charge to give you assets from it and you can’t amend or revoke it, then it can protect your assets from some types of creditors. Different types of creditors have different rights to assets in the Irrevocable Trust. The protection from someone getting hurt on your property and suing you is stronger than the protection from the IRS or Medicaid.
If your concern is liability protection, then you have two main defenses against lawsuits. The first is liability insurance. You should talk with your insurance agent to make sure you have an appropriate amount for the type of business you are in and the value of your business. The second main defense is to set up a Corporation, Limited Liability Company or Limited Partnership. These don’t necessarily protect the assets inside the corporation; they are designed to protect your other assets outside the corporation.
Be aware that there are different types of “partnerships” and some don’t give you any protection at all. If you and a buddy are partners and you haven’t filed any papers with the secretary of state, then you have a general partnership. Both or either one of you is responsible to the creditors of the partnership and your personal assets aren’t safe either. Basically, that means if your partner does something wrong while acting as a partner and gets sued and is broke, then the creditor can come after you and your personal assets for the full amount.
Many people set up their own Corporation or Limited Liability Company. They think that solely filing Articles of Incorporation is all they need for the full protection. Every corporation should also have internal rules of operation, often called by-laws, stock should be issued, corporate records and minutes of meetings should be prepared and maintained. All this additional paperwork is extremely helpful in giving you the protection that you want. Without it it is easier to argue that you have a sham company and that the court should ignore the protection that you thought you had.
Estate Planners of Arkansas, P.A. has prepared over 4,000 Estate Plans and hundreds of corporations and Limited Liability Companies. Call 1-501-414-8965 for your FREE initial consultation today.