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Do Irrevocable Trusts Really Protect You?

This is now officially QUESTION #1 coming in from visitors to my website!  Apparently the new word on the street is that if you are in trouble and want to protect your assets, just give them all away!  And better yet, give them away in this incredible vehicle called an Irrevocable Trust, which allows you to still have some control over what gets done with those assets and how.

And I must admit that this sounds like a great plan. I mean why not, especially if the objects of my generosity are my very own children or other close family members. On top of that, this type of protection can cost as little as FREE if you just transfer the assets outright. Even if you do want to have some control and use an Irrevocable Trust, since it is a simple domestic trust the cost can often run anywhere from $2,500 – $7,500 (pretty reasonable when you are talking about asset protection).

This does sound pretty good, so is there a catch? The answer is YES, there is a big catch. Consider the following:

  1. Giving all of your assets away out of the blue to your children, spouse or family is simply not a normal thing to do.
  2. When a judge sees that happen (outright or in an irrevocable trust) he/she will make a presumption that the gift was made to delay, hinder or defraud a creditor.
  3. This exposes the entire gift to a clawback by a judge.
  4. If the gift was outright, then the judge may simply bring it back (i.e. take it away from whomever you gave it to).
  5. If the gift was through an Irrevocable Trust, then the judge may invalidate the trust completely and remand the funds to the court, leaving you in a worse position then prior to the gift. (Worse because the job of finding and collecting all the assets has already been done for the court and the court doesn’t even need to take the assets away from you).

You can create an Irrevocable Trust, fund that trust, complete the gift, and leave all the assets right here in the good old USA. And if you follow the logic, and do not understand how the law really works, you may think that taking the time and effort to use an Irrevocable Trust somehow protects them in front of a judge. The irony is that often this just makes the job of the court and a creditor EASIER. You might as well just put a bow on that basket.

The Difference with a Full Asset Protection Plan

The most important difference is that in a true and well-structured asset protection plan, there is not a blatant gift made in the face of a creditor. In fact, this is a case where less is more. By taking legitimate steps to structure your estate and asset plan, you may move certain assets to legal tools such as a Limited Partnership or a Limited Liability Company without these transfers either being, or possibly even more important, appearing, to be a clear violation of the fraudulent conveyance laws.

While giving everything you have away is not a normal action at all, moving assets into legitimate business and estate planning tools IS a normal action for someone to do, even when faced with a crisis.  This is the key difference between the two strategies and makes all the difference when it comes to how a court will view your actions.

These tools in turn may be connected further to a special type of Irrevocable Trust called an Asset Protection Trust. While an APT is irrevocable, it is one in which you haven’t actually given your assets away. You remain the beneficiary of this trust and retain direct control until the assets are truly threatened. And if this trust is ever challenged you have the additional security of moving your assets away from the U.S. court, judge and jury (not available if you do a normal irrevocable trust).

It may help to think about it this way; A sophisticated Asset Protection Plan vs. a simple Irrevocable Trust is like the difference between driving down the highway at 85 mph in a new car with front, back and side airbags while wearing your seat belt and driving a motorcycle while wearing a helmet. While the helmet may give the illusion of security, which position would you really rather be in if you were heading for an accident?

And if you are even close to having a serious threat to your assets, then you are driving more like 130 mph with ice on the road.

Take Your Asset Protection Planning Seriously

The bottom line is that if you are serious about protecting your wealth, do your research online, and then when you think you understand the basics, or when you have reached the point where you are really confused by all of the conflicting information, pick up the phone and call the most expirienced attorney in this area (1-800-231-7112).  It need not be me or my firm, but I strongly encourage you to call someone who can walk you through this.  Remember, you are dealing with an incredibly important personal planning decision which affects your whole family, and going it alone is not a good option.

I recommend that you ask yourself what your goals truly are. If your answer is that you really want to protect your wealth, then I suggest you take a pass on any option which offers only the illusion of security and choose the one which will provide you with true protection.

Douglass Lodmell

One of The Nation's Leading Asset Protection Attorneys

This Post Has 202 Comments

  1. My mom is 77 has around 200,000 in bank and house appraisal at 250000 . My dad has late stage of alzheimers and needs to go to a special home. If she sends him there it will take all she’s got are they any way legal she can give all assets to us 4 kids and keep it on hold so she can get state to help pay so she can keep everything

  2. How does this work? Can I still access my assets? What are the conditions? What wouI be able to use my money for?

  3. Which instrument is best for avoiding probate: living trust; irrevocable living trust, or an enhaned life estate deed. My wife and I want to protect our home from probate for our children.
    Thank you

  4. I need help getting out of a irrevocable trust.the attorney only gives me money when he chooses.he has crossed many personal lines.and is very fickle as far as

    1. Colleen, this is a matter handled by a local probate/trust litigator. You can check websites like avvo.com that have listings of local attorneys by their specialty. If you look for someone with probate litigation experience, you are probably going to find qualified attorneys.

  5. I put 1000 thousand acres of good ag land witch is half irrigated and all of my farm eq cash in the bank as well my 500000 thousand life ins to be control by 4 trustees , The value of the trust is about 5 million, What would be a fair monthly retirement check?

    1. Any gift to a child is presumably the “sole and separate property” of the person receiving the gift, so the answer to your question is Yes. You can give assets to a daughter and the spouse or ex-spouse would not be able to touch the money.

  6. Hi, my late father was trustee of his house which was in irrevocable trust, which he gave me and my wife the house because I’m disabled. Now my wife is trustee and I’m the beneficiary there a company that filed lein/judgement on my late father and the house that is in irrevocable trust and there trying to take the house which is in irrevocable trust ? Can u give me advise please ?

    John

    1. John, A local probate litigator can help you better understand your exact options. Depending on how the trust is drafted, there may be provisions that protect trust property from creditors, especially for all property still in the name of the trust. Provisions in the trust called “spendthrift” provisions contain language that prevent assets from going to anyone other than the intended beneficiaries. You may need a trust attorney to help you defend the trust property from the creditor. Remember trust property is not part of your father’s “estate” but remains property of the trust and is therefore governed and defended by the trust.

  7. Hi, I am the trustee and disabled husband is the beneficiary which is a re
    Irrevocable trust that he set up before he past away 2014 and theres a person trying to take r house and it’s not a mechanics lien, and we live in Kansas so we clam as a homestead but the attorney is fighting by saying that my husband is the beneficiary since my father in law past in 2014 and the crediter has been trying since 2011 ?

    Any advice?

    Michele

    1. Michele, I am sorry for your loss and the difficulty you are having. This is a matter best handled by an experienced trust attorney with litigation experience. Creditors may make claims against the estate of a deceased person but it is often up to the language of the trust as to whether they creditor has any valid claim or not. A probate litigator in your area should be able to help you determine your options and to what extent the trust assets are protected from creditors. For example, if there are still assets in the trust and there are beneficiaries listed for when your husband passed away, then often the trust can protect those assets for the benefit of the current beneficiaries and protect trust assets from any creditors. You should consult with a local attorney to review the trust and circumstances to know where you stand and how to proceed.

  8. Hi, my father had put 5,000 down for a home for his children to live as a gift, i couldn’t put it in my name for credit reasons. His wife never acknowledged that property at all,or paid any she knew it wasn’t her property. She had gifted her child with more for down payment for her daughters townhouse amongst much more.There relationship has gone downhill , they are on the verge of divorce and she’s trying to weasel her hands on my property now because it’s in my dad’s name. What do you suggest to protect my house, it’s my college education. The house has equity in it now which should not be her concern but I’m worried she’s going to use my property as marital since my dad’s names on it. What should we do?

    1. Jason, I am sorry for this difficult situation. You are probably best to consult with a local probate litigator. Unfortunately the recorded deed in your father’s name is strong evidence of ownership, and the surviving spouse has generally has certain legal claim to the property absent a will or trust that leaves the property to you. If you have other evidence of the gift, then it may help you make claim on your legal claim on the home. An experienced probate litigator should be able to help you with this.

  9. My parents set up an irrevocable trust and funded it, (no creditors involved), they both have died what happens to the trust?

    1. Lance, my condolences on your loss!
      The trustee administers the trust according to its provisions. There are beneficiaries (you are probably one of them) that receive income, principal, or support depending on how your parents wanted to give away the trust assets. The trustee is legally responsible to protect the rights and interests of the beneficiaries. If you are a beneficiary, you should contact the trustee and ask how trust assets will be distributed to you. The trustee may be an individual or a company appointed by your parents. The trustee can hire a local attorney to help administer the trust because it can be a very complicated job involving inventories, tax returns, conveying property and assets etc.

  10. My Mother is 92 years old and in sound mind and body. Around 1990 she put her assets in an Irrevocable Trust. Her estate currently consists of a tract of 140 acres of prime farm land appraised at $1.5M and actively being farmed today, her home currently appraised at $200KK, a 2015 Toyota, and estimated cash of $150K.

    In 2011, faced with the reality that her youngest child, Patricia, was institutionized with early onset Alzheimer’s, she met with her attorney and changed the Irrevocable Trust to a Revocable Trust in order to remove Patricia from the trust and at the same time sold her house to her son who then put the house in a Life Estate for my Mother. Today the Trust remains a Revocable Trust.

    Reading the definition defining the difference between a Irrevocable Trust and a Revocable Trust, I have been told it was illegal for my Mother to change her Irrevocable Trust to a Revcocable Trust. Is this true? FYI: I am the son she sold her house to!

    What can you tell me?

    Sincerely,
    David B. Hickox

    1. David, I am sorry to hear about your sister.
      Your situation does raise some red flags because typically an irrevocable trust cannot be converted to a revocable trust. However, there are exceptions and strategies like “decanting” and other mechanisms built into trusts that allow for them to be modified or de-funded if it meets the intent of the original trust creators and/or does not violate the rights of beneficiaries. For example, changes to an irrevocable trust can be done when all beneficiaries agree to it, in many cases. Changes can also be done by having an attorney appeal to a local court to judicially change the trust, provided the changes meet certain criteria. Ultimately, the definitions of revocable and irrevocable are found in the trust statutes passed by your local state. You can search for your state’s “trust code” online and that should get you going in the right direction. We use irrevocable trusts in order to protect people’s assets. If you have questions regarding how to protect assets using a trust, please call us directly.

  11. My husband and I have a judgement against us for $25,000.00. From a credit card back in 2002. We have property and would like to put it in a asset protection plan for our children. Is this something we could do before the judge orders a surprise for us on our property? Would this protect our property. It is all paid for. Thanks for the info.

    1. Once a judgment exists against you, the risk is that any transfers, conveyances or movements of assets or property will be construed by the creditor as “fraudulent transfers” or “fraudulent conveyances”. You can pursue asset protection as long as you are not doing so with the “intent to delay, hinder, or defraud a known creditor”. Protecting assets for your children is an excellent goal and some of your assets may already be protected. You will want to ensure that whatever measure you take, you are able to still meet the $25,000 obligation.

    1. Jack,
      With 10 investment properties, we would like to understand more about your particular situation. Please call us so we can discuss directly as there are several considerations in determining the best way to protect your investments. 800-231-7112.

  12. About 12 years ago I saved my house for bankruptcy and mortgage I purchased the house from the mortgage company for $150,000 which originally is almost 300,000 but at the time I did not have the entire 150000 it had not yet been distributed to me from my grandfathers estate. So my cousin offered to lend me the money as at the time of paying him back they will transfer the deed back into my name once I pay him I could not get him to transfer it back to me and it took almost eight years to do that one sided I put it directly into my son’s name because I owe money to the IRS now we are considering selling the house so I can downsize but because my son lives in Georgia we will pay a 20% tax my question is can I now put it in an assets protection trust?

    1. You can always place your property into an asset protection trust provided you are not doing so with the “intent to delay, hinder, or defraud a known creditor”, as stipulated by the fraudulent transfer statutes of each state. The IRS is probably the strongest creditor out there, and is often characterized as a “super-creditor”. Any attempt to use asset protection planning to avoid the IRS is not advised because of their vast reach and authority. Ethical and sound asset protection planning should never have the purpose of evading taxes. If you have other assets to satisfy IRS obligations aside from the house/sale proceeds, then you can take measures to protect those assets. Transfer of property into asset protection structures generally presumes you are solvent and can meet your known obligations after the transfer is made.

  13. Sally has the following:

    Sally Living Trust, Sally TTEE

    on 1/1/10 Sally had a $1,000 5% CD Expiring on 12/31/10 & $1,200 10% Corporate Bond maturing on 12/31/10.

    Sally dies on 6/30/11.

    Per the trust, Joe is the successor trustee. On 8/1/11, Joe creates a new account and updates the trust to: Joe, TTEE, FBO Sally Living Trust (now irrevocable).

    My questions are:

    1a) Does Sally owe interest from 1/1 – 6/30/11 on her personal income tax return up until death?
    1b) If the bonds mature at the end of the year, who pays the taxes upon maturity?
    1c) Since the corporate bond has a premium, does the capital loss on the bond affect the irrevocable trust?

    All in all, I’m trying to figure out how many filings I need to do and where should the interested charged go.

    1. Thank you for your questions and I will apologize for not having the exact answers you are looking for. We advise clients on how to protect their assets from unknown sources of future liability and risk, especially from nuisance and frivolous law suits. You have some very good trust administration questions that are probably best directed at the CPA that will be preparing Sally’s final tax return and her Trust return. The death is more than 5 years ago, so you need to consider penalties for late filings. It’s just an observation, but Joe has been slow in his administrative duties and waited over a year and a half to open up a new trust account. Both bonds matured before Sally’s death, so I believe any income, gains and/or losses all accrue to Sally’s personal tax returns, but that is just my impression. If Sally’s beneficiaries are in need of asset protection advice, have them give us a call, and please seek professional accounting advice on the returns.

  14. My father has had his cabin in an irrevocable trust for 7 years. If he should become ill and go into a nursing home, not have all the funds with his social security check {monthly}, can the government make him sell his cabin, or will Medicare pick up the additional cost?

    1. Most state medicaid benefits for long term care have a 5 year look-back period on gifting of assets. Your father appears to have met this criteria, but please consult with a local elder-law attorney to ensure he meets the other qualifications required for these benefits. Best of luck to you and your father.

  15. I just Called the number and basically the person that answer did not want to do or say anything . They told me to go find the lawyer that set up the trust and the LLC which is being illegally held by his father since it actually is under my husband’s SS. My husband has terminal brain cancer.

    1. I am sorry that your question was not answered. Unfortunately we cannot analyze over the phone the estate or business planning done by another attorney. In this instance, we would recommend you seek out a local attorney that specializes in both estate planning and probate litigation. Most will offer you a free initial consultation.

  16. If my mother has her 2nd home/cottage held in a irrevocable trust want are the tax consequences to the those inheriting the real estate?

  17. My mother wants to leave her house and bank accounts to her four children in equal shares. My brother wants her to put the house in a land trust to him because he plans to buy the home and pay the other siblings off. He is also on her bank accounts and just wanted to divvy up that also into equal shares after her death. It’s this legal or should we do this some other way that would protect the other siblings rather then having everything in his name and trusting that he will do what he says? Thank you.

    1. While your scenario does not specifically raise asset protection concerns, there are some issues here that should be reviewed by a local attorney with strong estate planning and probate litigation experience. You should consult with a couple of attorneys and then choose one you are most comfortable with.

  18. How you must report income from an irrevocable trust depends on the trust and how it is drafted and who the beneficiaries are. You should seek local counsel from your atty or CPA on this issue.

    1. If the trust is “revocable” then the Trustee can simply move the trust out. It if was “Irrevocable” then you would need to look at the terms of the trust to determine what actions are possible.

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