Revocable Living Trusts and the Asset Protection Myth

Undoubtedly the use of Revocable Living Trusts in estate planning has become an inexpensive, yet valuable, alternative to a Last Will & Testament for middle class Americans.  The major benefit to using a revocable living trust is probate avoidance.  Decades ago, one would only see the most wealthy individuals using trusts for the transfers of assets after demise.

Unfortunately, it is still a matter of misinformation among some persons that these living trusts protect one’s assets from creditors.  They do not.  And, in rare cases, living trusts strip away asset protection for married couples which otherwise already may be in place.

When a married couple owns assets together, a creditor of only one of the spouses cannot attach assets held in both spouses’ names as “tenants by entireties”.  But, watch out:  This changes if the assets are held in a joint revocable living trust.  In a recent federal court bankruptcy decision in Florida, the husband (who had creditors) transferred assets into the title of living trust in both his name and his wife’s name.  Even though the joint revocable living trust had both the husband’s and the wife’s name on the trust, asset protection was lost.  The bankruptcy court concluded that there was no protection when the asset became part of the joint living trust in the same way as if the husband and wife had owned the asset outside the trust as tenants by entireties.

Until the law changes, if one spouse has creditors, then transferring assets from the joint names of both spouses (as tenants by entireties) to a joint revocable living trust may cause unexpected exposure to creditors.

Emma Hemness is a Board Certified Expert in Elder Law.  Her law firm, Hemness Faller Elder Law, is located in Brandon, Florida, and she practices in the areas of estate planning, elder care, and special needs planning.