Many people mistakenly believe that assets held in trust can avoid creditor attack from creditors of the creator of the trust. Unfortunately, this is not always true. There are many limitations to the use of certain trusts when it comes to lawsuits by creditors. If you are the trustee or beneficiary of a trust facing a trust litigation matter brought by a creditor, it is important to seek guidance from an experienced attorney right away.
Five Limitations of Trusts During a Creditor Lawsuit
The following are some of the general limitations of trusts when it comes to creditor protection:
- Creditors of the grantor can step into the grantor’s shoes and revoke the trust during a trust litigation matter.
- Assets held in a living trust are vulnerable to both present and future lawsuits against the grantor.
- Any asset fraudulently transferred to a trust can be attacked and recovered by creditors of the grantor.
- If the grantor maintains control or receives benefits from the trust, the assets are susceptible to attack by the creditor.
- Even if the grantors created an irrevocable asset protection trust, any asset that was not moved into the trust prior to the lawsuit is reachable by the creditor. This is known as “funding” the trust.
In some trusts, a spendthrift provision may be used to specifically address the issue of creditor protection. Our article, provides a helpful overview of spendthrift provisions for trustees and beneficiaries facing a lawsuit.
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