Creditor Claims & Your Trust

Some people have promoted Living Trusts and Family Trusts as a way to keep creditors at bay here in Idaho. But is that really an additional benefit afforded by such trusts?

In our opinion, it is not. While a trust may slow down your creditors, it will not thwart them entirely if they are persistent.

Each client at Peters Patchin & Monaghan receives individual attention to the unique details of his or her family, assets, and other circumstances. Estate planning partners, Ben Monaghan and Daniel Patchin have a wealth of experience in preparing Wills and Trusts since that – together with probate – is all that they do. Our firm has just the tools needed to craft your unique estate plan that will take care of those you love in your absence.

The rationale usually behind suggestions that creditors will be frustrated by the creation of a Family Trust is as follows: When you create a trust in Idaho and place all your property into the name of that trust, you no longer own that property. Instead, your trust owns it. So, when a creditor takes you to court and gets a judgment against you and then goes looking for assets in your name, none will be found. As a result, there’s nothing for the creditor to seize or have sold to pay off the judgment. Hence, they cannot touch your assets because legally they aren’t yours. Or, so the theory goes.

The primary problem with this analysis is that it overlooks one aspect of most Family Trusts. In almost every case, when you set up the Family Trust, you reserve the right to amend or revise the trust. This provision is intended to permit you to keep the trust up to date and to make ongoing determinations about who will receive the remaining trust property when you pass away.

But the Idaho judge in the case that resulted in a judgment against you will look at that power a little differently. He or she will conclude that this right gives you continuing power to reach into the trust and take your property back out. And so, the judge will effectively simply order you to do exactly that.

If you placed your home into the trust, for example, the judge has the authority to order you to deed it back out into your own name so that the creditor can have the home sold at a sheriff’s sale to satisfy the debt. Same with cars, bank accounts, stocks and bonds, and essentially all of the other assets that you originally moved into the trust.

And while having to go through that process will certainly slow a creditor down (and might even be frustrating enough that the creditor will throw up its hands and walk away from the case), it would be unwise to rely on the trust to protect your assets.

In the final analysis, there are really just two things that you can do to protect your assets. The first is to pay your bills in full and on time. The second is to purchase insurance policies – auto, homeowners, and umbrella – to protect you from claims based on injury or death. In our system of justice where debtors are expected to pay their legitimate debts, there’s really no other effective alternative.

It should also be noted that a few states (14 as of this writing) do currently have specific laws that permit the creation of a Family Trust to protect assets. But, Idaho is not one of those states. However, those states that do expressly permit the protection of trust assets impose significant restrictions including, most notably, that the trust may not be amended or revoked after it has been created. In our experience, almost everyone who creates an irrevocable trust here in Idaho wants to amend it or revoke it at some later date.

Furthermore, the cost to create such an asset-protection trust in such states is quite substantial. Typically, the cost to set them up will be in the $5,000 to $10,000 range. And after that setup fee has been paid, maintenance costs will often be in the $3,000 to $5,000 range per year.

In comparison, the cost to maintain a full range of insurance policies will usually be far, far less. So, for most people, maintaining suitable insurance policies (at least homeowners, auto, and umbrella) is a much more economical way to protect one’s assets from creditor claims here in Idaho.

If you would like our help in setting up your estate plan, please give us a call at 208-939-2600 to schedule your free initial consultation. Or you can schedule an expedited appointment at your convenience by clicking on either of the gold “Schedule Now” boxes on our Home Page.