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How an irrevocable trust shields your assets from creditors

On Behalf of | Jul 28, 2023 | Estate Planning, Trusts |

As you build your wealth throughout your life, you may also encounter the challenge of getting caught up in an ongoing cycle of debts. Concerns about managing these financial obligations in the event of your passing start to weigh on your mind. Naturally, you would not want your hard-earned assets to end up in the hands of creditors. You would not want to leave your loved ones vulnerable.

So, how can you protect your assets and ensure they are secure for your beneficiaries? The answer may lie in the “irrevocable trust.”

What is an irrevocable trust?

An irrevocable trust is a legal arrangement where the person creating the trust, known as the “grantor,” transfers ownership of their assets to a trustee. Once the assets are in the trust, the grantor no longer owns them directly. Instead, the trustee becomes the legal owner and holds the assets on behalf of the trust beneficiaries, which can include the grantor and others.

Safeguarding your assets from creditors

When you securely nestle your assets in the irrevocable trust, you can shield them from creditors. The key reason is that you, as the grantor, no longer own the assets outright; the trustee does. Therefore, your assets become off-limits to those looking to collect debts from you.

Even if you have set up a discretionary trust, where you are one of the beneficiaries, the protection still is intact. Distributions from the trust are at the discretion of an independent trustee, and since you do not directly own the assets anymore, creditors cannot touch them.

However, it is essential to act responsibly and avoid using the trust to defraud creditors. Remember to establish the trust with honest intentions. Courts have the authority to set aside transfers to the trust if they find any fraudulent intent.

An irrevocable trust can serve as an excellent shield against potential creditors. By placing your assets into the trust and no longer keeping direct ownership, you create a protective barrier. So, if you ever face creditor troubles, your assets will remain unharmed with the trustee.