Asset Protection and the Revocable Living Trust
The objective of asset protection planning is not to avoid paying legitimate creditors. On the contrary, good asset protection planning assumes you, the target of the litigation (referred to as the “debtor”), will pay all just debts and not attempt to use asset protection planning to unfair advantage.
Instead, the object of asset protection planning is lowering your asset profile. This is done to discourage frivolous lawsuits as well as thwart identity theft, phishing (being tricked into giving someone confidential information), pharming (being redirected to a criminal’s website rather than a legitimate one), and similar criminal schemes by keeping the assets out of your own name.
By transferring assets into a Revocable Living Trust, the assets are no longer held or reported in your name and thus it is much more difficult for criminals to find or access either the account information or the assets themselves. Thus, even if your identity is compromised and accounts accessed, the assets held in Trust should be unaffected and thus available for transfer to your new accounts to pay bills, etc., while the identify theft matter is being resolved.
In this way, a Revocable Living Trust can provide you with some degree of privacy and thus keep criminals from stealing your assets via identity theft or other similar schemes. However, a Revocable Living Trust cannot keep a creditor from getting to your assets. It does make it more difficult for creditors to access these assets; before doing so, the creditor must petition a court for a charging order to enable the creditor to get to the assets held in the Trust. But, if you get sued and lose, a court can order you to revoke the Trust and pay the creditor.
The Trust can be created to provide creditor protection to the beneficiaries of your Revocable Living Trust. Since a Revocable Trust becomes irrevocable upon the death of the grantor, an "anti-alienation clause" or “spendthrift clause” protects the assets held in the Trust from being used as collateral by the Trust beneficiaries. While the assets are held in the Trust, the beneficiaries do not have control over the property, and any distributions are subject to the Trustee's discretion. Depending on the terms of the Trust, creditors cannot force a Trustee to make a distribution to the Trust beneficiaries; thus the assets held in a Trust can remain outside the reach of the beneficiaries' creditors (until distributed into the hands of the beneficiary).
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