Do you remember that episode of the U.S. version of “The Office” where Michael Scott thinks he can seek bankruptcy protection from his creditors simply by walking into the office and stating, “I declare bankruptcy!” Obviously, that is not how bankruptcy works. Yet, when it comes to estate planning, some people operate under a similar misunderstanding of the law; they think they can shield their assets from their creditors by placing it in a trust.
How the Law Treats Revocable Living Trusts
Now, there are ways to use trusts as a legal means of asset protection, but when it comes to a revocable living trust–the most common form of trust used in estate planning–that is not the case. A revocable living trust is a means of avoiding probate, not a way to avoid paying back your creditors.
The reason for this is simple: A revocable living trust does not change the beneficial ownership of an asset. In other words, say you create a living trust and name yourself as the trustee. Then, you sign a deed transferring title to your home from yourself (as an individual) to yourself (as a trustee). Legally, the home is now an asset of the trust.
Practically speaking, you retain full control over the house. You can revoke the trust anytime you want. There is nothing to stop you from signing a second deed transferring the house out of the trust and back to yourself as an individual.
Wisconsin courts are well aware of how revocable trusts work. That is why you can not use them to shield assets from creditors. If someone holds a valid civil judgment against you, they can still file a lien against your house or attempt to seize any other assets in your revocable trust.
On the other hand, if you create an irrevocable trust–one that you cannot change after its creation–that can keep certain assets away from your creditors. With an irrevocable trust you hand all beneficial control over the trust assets to an independent trustee–i.e., someone other than yourself–so you are no longer considered the “real” owner of its assets. Irrevocable trusts are substantially more complex legal entities than revocable living trusts, so you should never attempt to form one without competent legal assistance.
Contact a Madison Trust Attorney Today
The estate planning lawyers of Krause Donovan Estate Law Partners, LLC practice law in the areas of Probate, Wills, Estate Planning, and Trusts. We assist clients in and around Madison, Wisconsin with all matters related to estate planning, trusts, and probate matters. Our dedicated attorneys will even make house calls if you are unable to come to our office.