It makes sense to seek ways to limit your personal liability and protect the assets you've acquired. A variety of factors affect what protective action you can take, such as whether you own a business. However, a common misconception is that a revocable trust -- also called a living trust or inter vivos trust -- can protect your assets from creditors. If your assets are held in a revocable trust, you can be sued and the assets in your trust are subject to collection procedures if you lose the lawsuit.
If you have assets that are held in a revocable trust, there is a possibility that you can be sued.
Your Revocable Trust Powers
When you create a revocable trust, you're called the grantor. Regardless of anything else involving the trust, as the grantor you have the right to revoke the trust and take your assets out of it at any time during your life. In a typical revocable trust, you name yourself as the trustee, or the person who controls the trust. You can also name yourself as the beneficiary -- the person who enjoys using the trust property.
Except for some extra paperwork, a revocable trust allows you to use and control your property in the same way you did before the trust was created. Because of your power to continue controlling and using the property in a revocable trust, the property is considered yours for purposes of your debts such as taxes owed on the trust property and payment of judgments made against you in a lawsuit.
Suing the Trustee
Although a trust is considered a type of legal entity, it needs a live person to act on its behalf -- that is, a trustee. The document used to create the trust will state the duties and responsibilities of the trustee to manage the trust assets. State law also sets forth basic rights and duties for trustees, one of which is the ability to sue and be sued.
For example, if your home is part of your revocable trust, the deed will identify the trustee as owner, such as "Michelle Smith, trustee of the Smith Family Trust." If a guest is injured in your home and wants to sue the owner for damages, the injured guest will include the trustee as a defendant in the lawsuit. A careful lawyer will probably name you as a defendant as well just to make sure the right parties are sued.
Why a Revocable Trust?
A revocable trust does serve some useful purposes, but lawsuit protection is not one of them. Depending on your estate planning needs, a revocable trust can be useful to prepare for unexpected contingencies and the future needs of your intended beneficiaries, such as your children.
For example, a properly prepared revocable trust document provides for a successor trustee to take over in case you become incapacitated and unable to manage your assets. This typically obviates the need for court action, such as a conservatorship. If you have minor children, the successor trustee is also empowered to take over if you die and is required to manage the trust assets for your children's benefit as stated in the trust document.
Protecting Your Assets
No one wants to contemplate losing their assets in a lawsuit, but there is usually no need to take extraordinary steps to protect your assets. For example, most states have "homestead exemption" statutes designed to protect part or all your property from creditors. Money placed in certain retirement accounts, such as IRAs or 401(k)s, are exempt from creditors as well.
For your assets that do not have any special protection, insurance can be purchased to cover you for accidents related to driving or injuries occurring on your property. If you own a business, incorporating or forming a limited liability company to run the business can protect your personal assets from your business creditors and debts.