The short answer to this question is: No.  I seem to keep trying to write the shortest blog post ever, but somehow the complexities of legal questions don’t seem to allow for that to be the case.  A living trust does not offer creditor protection under Colorado law, even if someone thinks they are super clever to get around the law.

I have had clients want to name their trusts something other than their own name  (so as to hide assets).  I have had other people put assets into a trust thinking there was no way someone would ever think to look into a trust, but those ideas simply are not enough to protect assets.  A revocable living trust is just not the correct type of trust to use to protect assets from creditors.

 

While You Are Alive, a Living Trust is Not Completely Separate From You

When you create a living trust, also called a revocable living trust or revocable trust, you are not creating a fully separate entity.  Instead, while you are alive, the trust is partially a separate entity, but also under your control, so the trust is partially you, especially if you are the Trustee and in charge of the trust.  As such, you and the trust are intertwined, so you and the trust are subject to the debt you owe, and you don’t get protection from creditors.

To get creditor protection, you would need to separate yourself from your assets, like you can do in an irrevocable trust.  I have compared a revocable trust to an irrevocable trust in a previous blog post, and I do make the point there that a revocable trust does not provide asset protection, where an irrevocable trust can provide asset protection.  This is because to get asset protection, you need to give up control of assets.  A living trust usually allows you to maintain control over your own assets, and if you have control, you cannot protect your assets from creditors.

 

Even if You Try to Be Clever, Creditors Can Get To Your Assets

I have some clients who want to be super clever and name their living trust something completely off the wall, like the Supernova Trust, or the Hogwarts Express Trust, insead of something like the Family Name Family Trust.  In doing so, the clients believe that they have protected the trust and that nobody can find the assets.  This is only true for the most cursory of inquiries into your assets or your trust.

If someone is searching for real estate in your name, using a different name of a living trust could keep them from finding you.  But, if the person searching knows your address, then the person searching can look up the owner of your house, and thereby get the name of your trust.  Any serious legal inquiry into your assets can uncover assets owned by your trust, and if the trust is a living trust, it will not offer legal protection from creditors under Colorado law.  Just by naming a trust something other than your family name, you are not getting the asset protection you might think you are creating.  In short – naming your trust something other than your names doesn’t really protect your assets.

 

A Trust is a Private Entity, but That Does Not Mean It Can Escape the Law

One of the advantages of setting up a living trust is that the living trust is a private document, so the entire public cannot simply know what happens inside of a trust.  This is true as it relates to probate matters, but not as to creditors.  If a will is submitted to the probate court, then the will becomes a public document, and anyone can request a copy.  This is how the wills of many famous people can be obtained, read, dissected, and learned from – we read many such wills in law school.  A living trust is not submitted to the probate court and does not become a public document.

However, if a creditor believes that assets are held in a revocable or living trust, the creditor can force the trust to divulge its terms and assets to the creditor, and the assets are open to collection of unpaid debts by a creditor.  The legal process of finding assets to enforce a debt or legal judgment is beyond what I do in my law practice, but I do know many attorneys who are quite adept at finding assets to enforce debts or legal judgments.  I hear the government is pretty good at finding assets, too, and I know none of us really want someone like the IRS coming after our assets.  A revocable trust simply does not offer protections against creditors and legal judgments.

 

A Living Trust Is Quite Useful, Just Not To Protect Assets

There are a lot of great reasons to have a living trust.  If you want to avoid probate, make life easier on your heirs and beneficiaries, or you need to remain in control of assets after you die, then a living trust can help accomplish these goals.  A living trust just doesn’t offer protection from creditors in Colorado.  If you want to protect assets from creditors, you would need to set up an irrevocable trust prior to incurring debts. Living trusts are great tools to use, but only for the correct purposes, and avoiding creditors is not one of those purposes.

An experienced estate planning attorney can help set you and your family up for success with a living trust and fully developed estate plan.  Book a call with Michael Bailey by clicking below.