A living trust does not protect your assets from a lawsuit. A living trust is a “self-settled” trust, which means the person who creates and funds the trust is also a trust beneficiary. Florida law states that a trust you create for your own benefit during your lifetime is not protected from your creditors.
Asset Protection For Your Children and Other Future Beneficiaries
A living trust can be written to provide substantial asset protection benefits for future trust beneficiaries, such as your surviving spouse and your children.
Suppose a living trust agreement provides that upon your death, the remaining trust property is held in continuing trust for the benefit of your spouse, children, or other beneficiaries. In that case, the money can be shielded from these beneficiaries’ creditors. A customized living trust may prohibit any payments to the beneficiary’s creditors or a former spouse.
Can A Living Trust Hold Tenants by Entireties Assets?
Spouses may lose tenants by entireties asset protection if they transfer their assets to a living trust. A living trust can hold tenants by entireties assets if it is drafted properly.
If a married couple creates two separate living trusts, any entireties assets transferred to either spouse’s individual trust will lose tenants by entireties protection as the property is no longer jointly owned by both spouses.
Transfers of entireties assets to a joint living trust can also forfeit entireties protection if the trust agreement is not properly drafted. A Florida joint living trust should include “entireties savings” provisions to show your intent to retain tenants by entireties ownership as joint trustees of the couple’s joint living trust.
Asset Protection Issues in Living Trust Design
A living trust plan usually undermines effective asset protection. A typical living trust for married people leaves the trust assets to the surviving spouse using the marital deduction from estate taxation. The assets may be left to your spouse outright or in a marital deduction trust. In either case, the value of the assets is not subject to the estate tax because of the unlimited marital estate tax deduction. This typical plan presents asset protection issues.
Trust assets left directly to a surviving spouse are vulnerable to the surviving spouse’s judgment creditors. Even assets held in a marital trust that uses the marital deduction are not creditor-protected; tax law requires the marital trust to distribute all income to the surviving spouse. The surviving spouse’s creditors can serve the trustee with a writ of garnishment to claim the mandated distributed income.
Instead of leaving assets to your spouse outright or in a marital trust, you may also leave your spouse the same assets in a different type of trust, known as an irrevocable “credit trust” or “family trust.” Money left for a surviving spouse in an irrevocable credit trust is not exposed to the surviving spouse’s creditors because a credit trust does not require income or principal distributions to the beneficiary spouse.
Customized Living Trusts Can Provide Some Asset Protection
Special customized living trust plans can provide some asset protection to married couples during their lifetimes. One such plan involves the spouses dividing their joint property into individual ownership and then each spouse creating a separate irrevocable trust for the other spouse with asset protection provisions in the trust agreement.
Florida law permits each spouse to become a beneficiary of their own trust upon the death of the grantee spouse. The trust is not considered a “self-settled trust” at that point, even though it originated by the surviving grantor, who becomes a beneficiary of the trust they first created. These special trusts protect marital assets from creditors and can also reduce estate tax.