We frequently receive inquiries from individuals interested in establishing trusts for creditor protection. Many of these individuals are concerned about potentially losing their home or other assets to creditors, whether through bankruptcy or as a result of judgments in lawsuits. However, Texas law provides limited options for clients who wish to maintain control over their assets while also securing strong creditor protection.
The type of trusts typically prepared by Heights Law Group are Revocable Living Trusts (“RLTs”). These trusts offer the most flexibility during your lifetime and become irrevocable on your death. During your lifetime you can amend or revoke your trust at any time. Often we structure our RLTs in such a way that the Grantors also serve as the initial trustees as well as being the primary beneficiary during their lifetimes.
RLTs are great tools for estate planning if they are properly and fully funded, as they avoid probate and offer privacy. They are also great tools for incapacity planning because if you become incapacitated, the person named as successor trustee will be able to slide into that role without court involvement, thus seamlessly transitioning management of the assets held in the trust. Unfortunately, because of their flexibility, RLTs offer little to no creditor protection.
One great benefit about RLTs is they typically don’t require their own tax identification number as long as at least one Grantor is living. Because of this, any income resulting from assets held in an RLT can be taxed as part of your individual income, reportable on your 1040, thus avoiding the compressed tax brackets irrevocable trusts must squeeze into.
The best asset protection an RLT offers is when the Grantors have died and the trust then becomes irrevocable by operation of law. At that time, the trust must obtain its own tax ID number and the successor trustee takes over management of the trust. Because you no longer own the assets due to your death, it’s unlikely creditors will be able to reach the assets held in the trust. If sub-trusts are created on the death of one or more Grantor, those sub-trusts are often irrevocable, and thus, creditor protected.
Briefly, an irrevocable trust is permanent and cannot be modified or revoked by the Grantor after it is created. Grantor gives up legal ownership and control of the assets once they are transferred into an irrevocable trust. Because the assets are no longer legally the Grantor’s property, they are generally beyond the reach of Grantor’s personal creditors. To be effective, the trust must be set up well in advance of any creditor claims. Transferring assets into a trust when you know a lawsuit is coming can be challenged in court as a fraudulent transfer, voiding the trust’s protection.
Heights Law Group rarely prepares stand-alone irrevocable trusts. If irrevocable trusts are prepared by Heights Law Group, they are usually prepared as part of a larger high net worth estate plan. As an alternative, Heights Law Group often prepares RLTs that have irrevocable trusts nestled inside them. Contingent trusts for minor beneficiaries, special needs trusts for retention of government benefits, and qualified terminal interests trusts are a few examples of sub-trusts, the provisions of which, can be nestled inside an RLT and which are not triggered until or unless certain circumstances occur.
Below is a basic chart illustrating the differences between revocable and irrevocable trusts.
| Feature
|
Revocable Trust | Irrevocable Trust |
| Flexibility | High. The grantor can change or revoke the trust at any time while they are alive and competent. | Low. The trust generally cannot be changed or terminated without the consent of the beneficiaries or a court order. |
| Control of
Assets |
High. The grantor can serve as the trustee and maintains control over the trust’s assets, including the ability to add, remove, or sell them. | Low. The grantor must relinquish control of the assets to the trust once it’s created. |
| Probate | Avoids probate. Assets in a revocable trust pass directly to beneficiaries upon the grantor’s death, bypassing the time-consuming and public probate process. | Avoids probate. Assets in an irrevocable trust also avoid probate. |
| Asset Protection | No protection. Because the grantor retains control of the assets, they are not protected from creditors or lawsuits. | Strong protection. Assets are no longer owned by the grantor, so they are generally shielded from creditors and liability. |
| Estate Taxes | No reduction. The assets remain part of the grantor’s taxable estate and may be subject to estate taxes if the estate exceeds federal or state exemption limits. | Can reduce taxes. Since assets are removed from the grantor’s estate, they are not subject to estate tax. This is useful for large estates. |
| Government Benefits | May affect eligibility. Since the grantor retains control, the trust’s assets are counted when determining eligibility for means-tested government benefits like Medicaid. | Can aid eligibility. By moving assets out of the grantor’s name, an irrevocable trust can help someone qualify for government programs like Medicaid or SSI. |
| Privacy | Provides privacy. Like irrevocable trusts, a revocable trust keeps the details of your estate and asset distribution private, unlike a public will. | Provides privacy. Irrevocable trusts also ensure that asset distribution remains private. |
If you believe what you are looking for is an irrevocable trust, please contact us. Let the attorneys at Heights Law Group help you navigate the complexities of trust planning and help you design an estate plan tailored to your needs and goals.
