Myth #7: Trusts Protect Assets From All Creditors

Myth: Many people assume all trusts offer the creditor protection provided by irrevocable trusts, and many people think that supposed protection is “ironclad” or “bulletproof”.

TV Shows:

1. Succession (2018–2023): The Roy family’s wealth is structured in ways that make it nearly untouchable, even during corporate lawsuits and scandals.  The show implies that trusts and legal structures protect their assets from financial ruin and lawsuits.
2. Billions (2016–2023): Billionaire hedge fund manager Bobby Axelrod hides assets in trusts and offshore accounts to shield them from government seizures and lawsuits.

Sources: Why the Myth Exists?

1. Confusion With Irrevocable Trusts.  People often don’t understand the difference between revocable and irrevocable trusts. Revocable trusts, the most common type used in estate planning, do not protect assets from creditors, but many assume they do. 
2. Marketing Hype.  Some financial or legal services promote trusts as “bulletproof” asset protection tools, without clearly explaining the nuances, leading to unrealistic expectations.
3. Association with Wealthy Individuals.  High-profile cases where wealthy individuals have successfully shielded assets using complex trust structures contribute to the belief that trusts always provide this level of protection.

Reality: While certain irrevocable trusts can offer asset protection, not all trusts are designed for this purpose, and even those that were have limitations.

• Revocable Trusts (Living Trusts): No Creditor Protection.  Revocable trusts are designed primarily for estate planning, probate avoidance, and incapacity planning. The key feature is that the grantor (the person who created the trust) can: 
  • Change the trust
  • Move assets in and out
  • Terminate the trust at any time

Since the grantor maintains control over the assets, creditors can reach them just as if they were owned outright. This includes debts from lawsuits, divorce settlements, and bankruptcy.

• Irrevocable Trusts: Some Creditor Protection (With Conditions).  Irrevocable trusts can offer creditor protection because once assets are placed in the trust, the grantor gives up control over them. However:
  • Fraudulent Conveyance Laws: If assets are transferred to an irrevocable trust with the intent to defraud creditors, courts can reverse the transfer.  The vast majority of people seeking asset protection trusts do so too late, after a claim has been made or is reasonably foreseeable.
  • Exceptions for Certain Creditors: Even with an irrevocable trust, some creditors can still access the assets, including:
    • The IRS (for unpaid taxes)
    • Child support obligations
    • Spousal support / alimony (in some states)
    • Government claims (like Medi-Cal or Medicaid recovery)
• Domestic vs. Offshore Asset Protection Trusts
  • Domestic Asset Protection Trusts (DAPTs): Available in some U.S. states (e.g., Nevada, Delaware, Alaska, South Dakota), these trusts can offer strong protection, but their effectiveness varies by state law and specific circumstances.
  • Offshore Trusts: These can provide greater asset protection but are complex, costly to maintain, and may raise legal issues, especially if used to evade legitimate debts.