One of the more common reasons that people create a trust when estate planning is to protect their assets. They don’t want creditors to bring a lawsuit against them when they age and must live on a fixed income. They may also worry about claims during the probate process that could diminish their legacy.
The resources in a trust do not belong directly to an individual anymore and usually have protection against creditor claims. However, sometimes resources in a trust are the subject of a lawsuit brought by creditors. The assets used to fund a trust could be vulnerable to litigation under certain circumstances.
Fraudulent transfers could lead to legal action
In general, the assets that someone transfers to a trust become the property of the trust. Creditors and others who take legal action against the person who created the trust usually cannot access those resources. Still, there is a very important exception to that rule. Specifically, when creditors can convince the courts that a transfer was fraudulent, they can potentially seek control over certain assets or demand the liquidation of resources transferred to the trust.
Fraudulent transfers occur when someone intentionally uses a trust to avoid financial responsibility. Therefore, a transfer into the trust after someone accrues a certain debt could trigger allegations of fraud. Similarly, transfers that leave someone destitute could also lead to claims of fraud from creditors in the future.
Barring scenarios in which there are questions about the legality of the use of certain assets to fund a trust, people can typically count on trusts to preserve their assets as they age and after they die, provided that the trust in question is crafted in specific ways with the assistance of a skilled lawyer.