Does a Trust Protect from Creditors?

By Barry Peters | May 25, 2019

Clients occasionally wonder whether creating a Family Trust will shield them from creditor claims? The short answer is, “Not really.”

The rationale for the question is rooted in the fact that when you create a Family Trust or Living Trust, your real estate, vehicles, and bank and stock brokerage accounts will, in the process, be changed into the name of the trust.

After that has been done, if one of your creditors obtains a judgement against you, it will name you as the debtor, rather than the trust. And since the assets are in the name of the Trust instead of in your name, the judgment cannot be enforced against those trust assets.

But the weakness in this argument is that the judge in the case with the creditor can (and will) order you to transfer assets back out of the trust and into your own name once he or she is informed that you have a trust. And once the assets are back in your name, the creditor can have the asset sold to satisfy the debt.

The existence of the trust may require the creditor to do a little extra legwork, but it will not ultimately enable you to dodge the liability. So, a person creating a Living Trust or Family Trust should not expect that trust to provide any significant protection from creditors.