Does a trust protect assets from litigation?

The short answer is "no." While a more detailed response is best provided by an estate planning attorney, here is general information about trust litigation.

Reasons for Litigation

One important fact to keep in mind is that revocable living trusts hold assets for beneficiaries, they do not protect assets from creditors. Irrevocable trusts, trusts that usually cannot be changed after assets are transferred into the trusts, can offer protection from creditors. Neither type of trust, however, is exempt from litigation. Here are a few reasons why disputes can occur over assets within a trust:

  • Grantor of trust was under some type of "influence" when trust was created

  • Grantor of trust was wrongfully persuaded to assign assets to a particular beneficiary (for instance, children might take stepmom to court for wrongfully persuading their father to amend trust and leave all of his children's assets to her)

  • Grantor of trust lacked legal capacity to create a valid trust

  • Trustee commits fraud

How to Prevent Litigation

To help prevent your beneficiaries from bringing suit against your trust, consider the following:

  • Select a Trustee with accounting knowledge, or who is connected to a CPA that can provide regular trust accounting

  • Regularly review trust document

  • Design trust specific to your situation that can anticipate and resolve any future conflicts

Keep in mind that assets not held within a trust can be subject to probate and undergo probate litigation. For more information on trust and estate planning, please see my article Estate Planning 101.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.

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