Can a Living Trust Protect a Home From a Lawsuit?

Different types of trusts serve different purposes, and you can usually tweak yours by including the right language in your documents to ensure that it meets your needs. If you're worried that someone might sue you and win, resulting in a legal claim against your home, some trusts can protect your property from this eventuality. You'll have to give up something in exchange, however.

TL;DR (Too Long; Didn't Read)

You may use irrevocable trusts or asset protection trusts to protect your home from a lawsuit, but you should keep in mind the limitations.

Exploring Revocable Trusts

A revocable trust is predominantly an estate planning tool. You create it and fund it with your assets, and then you typically act as its trustee. You still have the right to add assets, remove or sell some or change your beneficiaries. If you decide you no longer want your revocable trust, you can undo it.

Because of your continued control and extended ownership of your property, a revocable trust avoids probate, but it doesn’t accomplish much else. It can't protect your assets from lawsuits or creditors because you technically still own the property. It doesn’t matter if your trust holds your home or your stock portfolio – your creditors or anyone else who sues you can reach them just as easily as if you had never transferred them into a trust at all.

Understanding Irrevocable Trusts

An irrevocable trust protects your assets, but not without limitations and drawbacks. You don't act as trustee of an irrevocable trust – you appoint someone else. After you transfer your assets, you lose the right to take them back. You can't manage them, and you can't change your mind and revoke the arrangement.

Someone else acts as trustee, and there's no escape hatch if you decide the arrangement isn't to your liking. If someone sues you, he can't get to your house if you include it in your trust because it's not technically yours any longer – it belongs to your appointed trustee.

Limitations exist, however. Creditors you owe at the time you move your house into the trust, or the plaintiffs in an active lawsuit, still have a potential right to the property. Your irrevocable trust can only protect against creditors you don't have yet or lawsuits that haven't started yet – they can't even be on the horizon. Otherwise, the transfer may be considered a fraudulent conveyance. A court can say that you created the trust and moved your property into it to avoid losing it.

Looking at Asset Protection Trusts

An asset protection trust is specifically designed to ward off claims from lawsuits or creditors. It's irrevocable, so after you fund it with your house, what's done is done – there's no going back and reclaiming your property. The trust documents have several safeguards built in, such as instructing your trustee to literally dodge creditors by moving ownership of your property to another jurisdiction if it's threatened. He can do this by establishing a trust in a new state or country, then transferring ownership of your house into it.

United States law takes a dim view of asset protection trusts. An onshore or domestic asset protection trust keeps ownership of your assets in the country, but due to federal legislation regarding avoidance of creditors, these are rare. You have the option of establishing a foreign or offshore trust instead, but this might only be a viable option if you have a lot of very valuable assets to protect, not just your house.

Considering Other Options

If you're not staggeringly wealthy yet and you just want to protect the roof over your head, you may have a few alternatives besides establishing a trust. Forming a limited liability company to hold your property can also avoid lawsuits.

Depending on where you live, you might not have to do anything at all. Some states offer homestead exemptions, meaning that even if you're up to your ears in debt or have angry, rabid litigants breathing down your neck, the home you live in is exempt from their claims. If you're only worried about protecting your house, speak with a local attorney to explore your best options.

the nest