Protecting Property in a Trust

What a trust protects well

• Probate: property properly titled in a trust passes under the trust terms without a probate case.
• Incapacity: a successor trustee can manage the property without a court-appointed conservator or guardian.
• Privacy: a trust is usually not filed with a court, unlike a will that goes through probate.
• Beneficiaries: a trust can hold property for minors, people with disabilities or people who should not get large sums outright.

Spendthrift protection for beneficiaries

A spendthrift clause stops a beneficiary from transferring their interest and stops the beneficiary’s creditors from reaching it before it is paid out. Uniform Trust Code § 502 recognizes these clauses, and § 503 lists exceptions, such as claims for child support. As a result, a parent can leave property in trust for an adult child with some protection from that child’s creditors.

Protecting your own property is harder

Creditors can usually reach property that a settlor puts in a trust for their own benefit. A revocable trust gives no protection from the settlor’s creditors (Uniform Trust Code § 505(a)(1); California Probate Code § 18200). For an irrevocable trust, the settlor’s creditors can generally reach the most the trustee could pay to or for the settlor (§ 505(a)(2)). California Probate Code § 15304 likewise refuses to enforce a spendthrift clause against the settlor’s own creditors.

Some states, such as Nevada, Delaware, South Dakota and Alaska, allow domestic asset protection trusts. These are self-settled trusts that can protect property if strict statutory rules are followed. Even then, the protection has limits, especially for people who live in other states.

Transfers to avoid creditors can be undone

A transfer into a trust made to hinder, delay or defraud creditors can be set aside under state voidable transfer laws, which many states base on the Uniform Voidable Transactions Act. In bankruptcy, 11 U.S.C. § 548(e) lets a trustee recover transfers made to a self-settled trust within 10 years before filing, if made with actual intent to hinder, delay or defraud creditors. So asset protection planning has to happen before problems arise, not after.

Medicaid and public benefits

Transfers into many trusts can affect Medicaid eligibility for long-term care. Federal law uses a 60-month look-back period for transfers to trusts (42 U.S.C. § 1396p(c)). Special needs trusts follow separate rules. Get advice from an elder law attorney before moving property for this reason.

Trust law is state law. More than 30 states have adopted versions of the Uniform Trust Code, while others, including California, have their own trust codes. Read your state’s statute, and talk to a licensed estate planning attorney before you sign or fund a trust.

Researching protecting property in a trust in your state

To research protecting property in a trust for a real matter, start with the primary sources. For example, read the statute, the rule and the documents in your own file. Then look for recent appellate decisions from your state, because they control how local courts read the law. After that, compare what you found with the federal rules that may also apply. Our state procedures guide and the Research Center can help you find and check each source.

Sources and further reading

Official sources used on this page:

• legislature.maine.gov
• law.cornell.edu
• law.cornell.edu

Related reading on Lawtopolis:

• Revocable vs. Irrevocable Trusts
• How a Trust Is Created: Formation Requirements
• Common Law Trusts and Unincorporated Trusts