JohnAlanCohan@aol.com 310.278.0203 Probate/Conservatorships IRS Audits IRS Collection IRS Appeals U.S. Tax Court IRS Criminal Investigation Tax Litigation Tax Opinion Letters Business Plans Aviation Law Tax Exempt/Nonprofit Organizations All aspects of equine and livestock law, particularly tax matters, syndications, business plans, tax opinion letters, and drafting of business documents.		Creditors and Living Trusts by John Alan Cohan, Attorney at Law Is it true that creditors’ claims can be avoided by implementing a living trust? I am frequently asked this question when clients come into my office to review their estate planning needs. But, contrary to popular misconception, living trusts do not afford protection against creditors. This false account about creditors’ claims has been fostered by the sometimes inappropriate use of living trusts. In fact, due to revisions in the laws of several states, creditors have greater rights than ever before to go against assets held in a living trust. For most people faced with ongoing concern over the protection of assets, a simple will is your best procedure for several reasons. Once a will is admitted to probate, creditors have only four months to present a claim against your estate--compared to one year or longer for living trusts. Also, your executor need send notice only to creditors who are known or reasonably ascertainable, but not to a creditor whose claim is merely conjectural. In other words, in probate there is no duty for the executor to pour through the decedent’s files to come up with a possible claim. Also, probate bars claims from creditors who do not submit court approved forms within the time allowed. Late claims are rejected, which is an important protection for your estate. There are very few other areas short of bankruptcy that provides this kind of ability to cut off creditors’ claims so decisively. By comparison, creditors can go after assets in a living trust for a prolonged period of time. It is therefore not prudent to think of a living trust as a shelter from creditors, for it simply does not provide that protection. Sometimes I am asked: Is there any way I can ward off creditors by transferring property, such as a home or a bank account, into another person’s name? This gets into another area of the law pertaining to transfers of property in fraud of creditors. A transfer of any item of property to a third person at a time that you are technically insolvent may give creditors certain rights against you for fraud. Setting up a joint tenancy bank account, for example, or transferring real property into joint tenancy at a time when you are technically insolvent, has been deemed to constitute a fraud against creditors. In other words, you cannot avoid liability for debts merely by changing the title on your property. People do it anyway, but a creditor can still reach that property through litigation if it is worth their trouble. Living trusts are viable and important vehicles in planning for moderate-sized estates, but another myth about living trusts is that you can save money on taxes. That is absolutely false. Estate taxes and income taxes are exactly the same whether you give or inherit property through a will or via a living trust. The only exception pertains to married couples with larger estates, who may qualify for what is called an “A-B” trust. For unmarried persons who are cohabitating with someone else in a relationship, it often may be desirable to have a living trust because of the privacy feature. A living trust is a private document which, upon death, is privately administered. It is not filed with the probate court. The accounting of assets of the estate and distribution of property are done without court supervision and without going through probate court proceedings. Many single persons prefer living trusts because they think it is harder for relatives or other people to “contest” the estate. Actually, the law governing will contests is the same as the law pertaining to living trusts. It is a little harder, though, because someone who wants to contest a living trust has to file a lawsuit, whereas will contests take less doing to get the matter heard. If you think you or your estate might save money with living trusts, be sure to ask a lawyer who is familiar with both living trusts and wills and does not have a “trust mill” operation. Various groups have mass-marketed living trust kits or packages to the general public. They rely upon volume sales, and provide documents which are boilerplate forms created with little personal planning or consideration of a client’s individual circumstances. In short, if you are interested in a living trust, seek competent legal counsel, who can address your specific needs and assess the appropriateness of a living trust. The trust mill situation can and does often result in botched, unskilled, and overpriced services. Back to Top