When it comes to safeguarding your wealth, trusts are often the first tool people consider. However, the level of protection they offer depends heavily on how they are structured. In the legal world, there is a "conventional wisdom" regarding asset protection, but as with all things in law, the details matter.
The Difference Between Revocable and Irrevocable Trusts
In "Law School 101," the general rule is simple: if the beneficiaries can access the assets within the trust, then so can their creditors. This is why irrevocable trusts are typically the primary vehicle for asset protection. Once assets are moved into an irrevocable trust, the grantor gives up control, making it much harder for creditors to reach those funds.
In contrast, the revocable living trust—perhaps the most popular type of trust for estate planning—offers virtually no asset protection. In a typical setup, the person who creates the trust (the trustor) also serves as the trustee and the primary beneficiary. Under Texas law, specifically Texas Property Code § 112.035, if a settlor is also a beneficiary of a trust, a spendthrift provision does not prevent their creditors from reaching their interest in the trust. Because you maintain total control and can "revoke" the trust at any time, the law views those assets as still being yours.
Trusts Are Not Legal Entities
A common misconception is that a trust is a separate legal entity, like a corporation or an LLC. In reality, a trust is a fiduciary relationship between a trustee and a beneficiary regarding specific property. Because it is not a standalone legal "person" in the same way a business entity is, the protection it provides is derived purely from the terms of the trust agreement and the statutes governing it. Without the proper restrictive language or "spendthrift" clauses, a trust is simply a holding vessel that remains transparent to legal claims.
Why Control Matters for Creditors
The key to asset protection is the lack of control. If you have the power to pay yourself from the trust, a judge can typically order you to use those same funds to pay a judgment creditor. For a trust to truly shield assets, there must be a genuine separation between the person who owns the assets and the person who controls them. This is why simply putting your house or bank account into a revocable trust for probate-avoidance reasons will not stop a creditor from seizing those assets if you are sued personally.
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