The main purpose of a revocable living trust is to hold your assets in an entity that is separate from you personally, so that if you die or become incapacitated, the assets can be controlled and managed by someone else (your successor trustee) without the need for a legal proceeding to appoint either a personal representative or a conservator.
A revocable living trust isn’t separate from you for other purposes, however. Since you can revoke the trust, or pull the assets out of the trust, at any time while you are still alive and competent, the trust isn’t separate from you for tax or liability purposes. That’s why a revocable living trust doesn’t shield your assets from your creditors if the creditors attempt to collect on your debts.
Nathan Hannah, Attorney
Certain assets owned by individuals are shielded from the claims of creditors by law. Those exemptions are available whether you have a trust or not. In Arizona, the exemptions include:
- Up to $150,000 of equity in a primary residence;
- Household items having an aggregate value of up to $6,000;
- Certain personal items, including a vehicle with equity of not more than $6,000;
- Retirement accounts; and
- Tools used in a trade, business or profession, valued up to $5,000.
There are some trusts, or trust-like arrangements, that will protect your assets from the claims of your creditors. They are often quite complex, though, and will almost always involve some relinquishment or impairment of your ability to control the assets. The concept is that if you retain control of the assets, the assets are generally going to be available to satisfy your debts. In other words, there is no such thing as a free lunch.
Some relatively recent legislation in a few states has created arrangements that purport to alter, or at least chip away at, the basic concept that retaining personal control of assets makes the assets subject to the claims of your creditors to satisfy your personal liabilities. Even those arrangements have limitations, however, and are not always effective in shielding the assets from the claims of creditors. If you are thinking about pursuing such an arrangement, I suggest that you proceed with caution. I also suggest that in deciding whether or not to pursue such an arrangement, you should not rely solely on the advice of the person or organization who is promoting the arrangement.
Nathan B. Hannah is a Shareholder in the Tucson office, and practices in the areas of estate planning and administration, real estate, and commercial transactions. He is also a noted blogger, and you can find more of his articles on his private blog,
Contact Attorney Hannah: nhannah@dmyl.com or 520/ 322-5000
This communication is designed to bring legal developments of interest to the attention of our clients and others. It should not be relied upon as a substitute for specific legal advice in a particular matter. For further information on any of the subjects discussed, or for legal advice in connection with any particular matter, please contact us.
