Is My Trust Safe from Lawsuits?

Many individuals turn to trusts to safeguard their assets, streamline the inheritance process and maintain privacy. While a well-structured trust can offer significant protection, it is not automatically immune to lawsuits. The type of trust, its funding, and management all play a role in determining its legal vulnerability.

Revocable vs. Irrevocable Trusts

The first thing to understand is the difference between revocable and irrevocable trusts. A revocable trust—also called a living trust—can be changed or dissolved by the grantor at any time. Because the grantor retains control, the trust assets are still considered part of their estate. This means they can be subject to lawsuits, creditor claims and estate taxes.

In contrast, an irrevocable trust removes the assets from the grantor’s control. Once transferred, the assets belong to the trust itself. This separation offers greater protection from creditors and legal judgments but comes at the cost of flexibility. You cannot modify or revoke the trust without legal hurdles or court intervention.

If asset protection is a primary goal, an irrevocable trust is typically the better choice.

When can Trust Be Challenged?

Even a carefully drafted trust can face legal challenges under certain circumstances. Common reasons include:

• Claims of undue influence or diminished capacity: Heirs may argue the grantor was coerced or not mentally competent when creating or amending the trust.
• Allegations of mismanagement: If a trustee fails in their fiduciary duty, beneficiaries can bring legal action against them.
• Disputes over asset distribution: Unclear or inconsistent terms can lead to family conflict and potential litigation.

To minimize these risks, it is essential to have clear language, thorough documentation, and a competent trustee. Some individuals choose corporate trustees to reduce the risk of personal bias or mismanagement.

Are Trust Assets Safe from Personal Lawsuits?

For revocable trusts, the answer is generally no. Because the grantor retains control of the assets, they remain vulnerable to personal lawsuits, such as claims arising from car accidents or business disputes. In the case of irrevocable trusts, the assets are better protected, provided the trust was not established with the intent to defraud creditors or avoid existing obligations.

Timing also matters. Courts may scrutinize asset transfers into a trust if they occur shortly before a legal claim arises. This is especially true in bankruptcy or divorce proceedings.

Additional Strategies for Protection

For high-risk individuals, such as business owners, physicians, or landlords, advanced asset protection planning is often necessary. This might include:

• Domestic or offshore asset protection trusts
• Limited liability companies (LLCs) are used in conjunction with trusts
• Insurance policies to cover legal risks

A trust is just one piece of the puzzle. Comprehensive protection often involves combining legal, financial and insurance strategies tailored to your unique situation. Contact us today to schedule a consultation and protect your estate plan from legal risks, ensuring that your wishes are fulfilled.

Key Takeaways

• Flexibility in planning: Revocable trusts offer flexibility but little legal protection from lawsuits or creditors.
• Strong legal protections: Irrevocable trusts provide stronger protection. However, assets must be truly relinquished.
• Legal challenge risks: Trusts can be challenged in court due to fraud, mismanagement, or ambiguous terms.
• Importance of timing: Courts may scrutinize asset transfers made shortly before legal disputes arise.

Legacy One Law Firm, APLC is an estate planning and probate administration law firm in Los Angeles, California, serving families throughout the State. Schedule a quick and easy consultation with our estate planning attorney, Sedric E. Collins, Esq., or call 323-900-5450.