If you're concerned about shielding your assets from lawsuits or debt collectors, you might be wondering: Can creditors go after an irrevocable trust? In many cases, the answer is no. These trusts offer powerful asset protection when used correctly. 

An irrevocable trust is a legal and financial tool used to protect assets and reduce tax liabilities. Upon its creation, a grantor must relinquish control of the assets placed into the trust. Take a closer look to understand the protections they provide.  

Can Creditors Go After an Irrevocable Trust? Not Usually

In most cases, creditors cannot go after the funds in an irrevocable trust. That is because the grantor is no longer the owner of those assets. 

As with many other financial tools, there are some exceptions you should be aware of. In this case, if you establish an irrevocable trust for the sole purpose of defrauding creditors, they may be able to access the funds. Protection can also be limited if the grantor retains too much control over the assets. 

What Is an Irrevocable Trust?

An irrevocable trust is a legal and financial instrument that a grantor places assets into. Once established, the grantor loses access to and control over those assets. As its name suggests, this type of trust is permanent. A grantor cannot revoke or modify it without the consent of all of its beneficiaries or a court order.  

What Are the Advantages of an Irrevocable Trust?

The major advantage of an irrevocable trust is that it can shield assets. This can be helpful in many situations, such as helping you qualify for Medicaid assistance for nursing care. 

It also removes the property from your assets, so you are no longer directly responsible for taxes on them. In some situations, this can help reduce estate taxes for beneficiaries. However, you should consult a tax professional to see if an irrevocable trust is a viable part of your estate planning. 

What Are the Disadvantages of an Irrevocable Trust?

The same qualities that make irrevocable trusts attractive are the ones that can prove disadvantageous. You actually sign your assets over to the trust, so they no longer belong to you. That means that if you want to reclaim the funds, you cannot do it. 

Another drawback is that the process of creating an irrevocable trust is complex. It can require specialized advice and guidance from multiple financial and legal professionals. Because of its complexity, you want to ensure that the trust is set up correctly the first time through. 

Why and When Are Irrevocable Trusts Used?

Irrevocable trusts are an important estate planning tool. They are frequently used to protect assets from creditors or to relinquish assets to obtain special benefits. For example, they are frequently used to establish eligibility for Medicaid nursing benefits. 

They are also an excellent tool for tax planning and charitable giving. You can use an irrevocable trust to bequeath assets to a favorite charity. You can also use them to help reduce the amount of your estate that goes to probate and creditors after your death. 

How Can Assets in an Irrevocable Trust Be Used?

Irrevocable trusts can be used for a wide range of expenses. For example, the trust can pay for a beneficiary’s housing, education, medical care, and transportation costs. The major fact to keep in mind is that the funds placed in the trust must be used for the beneficiaries. 

The grantor gives up the right to assets placed in an irrevocable trust, so it cannot pay for your daily living expenses. Guidelines for what trust funds cannot be used for include:

• Gifts returned to the trust
• Personal expenses
• Utility bills

Additionally, the funds should not be used to pay for the grantor’s housing. This includes utilities, mortgage or rent, repairs, and homeowner’s insurance. 

Are Irrevocable Trusts Protected From Creditors?

The main way an irrevocable trust is protected from creditors is by the full and complete transfer of personal assets into the trust. The grantor gives up ownership of the assets placed into trust. The Internal Revenue Service, banks, and courts recognize the trust as a separate entity, so the assets are no longer part of the grantor’s estate. 

This transfer of ownership removes control from the grantor for any decision-making. Because that control cannot be taken back, the grantor no longer has access to the funds and neither does his creditors. 

There are specific state laws that apply to trusts, so it is important to speak with a legal professional about how to protect your assets. You should be aware that establishing an irrevocable trust specifically to protect your assets from creditors can limit any protection it would otherwise provide.  

Learn More About Why Creditors Cannot Go After an Irrevocable Trust

Typically, creditors cannot go after an irrevocable trust, making it a valuable tool for many people. AmeriEstate offers specialized and affordable estate planning services, including irrevocable trusts. If you are considering establishing a trust, our legal experts can help. Contact us to learn more about how irrevocable trusts protect your assets from creditors.