Using Trusts to Protect Your Assets

Q: Does my irrevocable trust protect my trust assets from third party claims or creditors?

A: In general, transferring your assets to an irrevocable trust does not protect the assets from your own creditors or potential judgments, but any assets left to other beneficiaries of your trust can be protected from the beneficiary’s creditors.

An irrevocable trust is a type of trust that cannot be amended by the creator (or “grantor”) except under limited circumstances. Where the grantor is not the trustee and cannot exercise control over the trust property, the trust assets may be beyond the reach of the grantor’s creditors. However, New York’s Fraudulent Conveyance Law prevents irrevocable trusts from being used as a tool to escape creditor collection. This law essentially invalidates any conveyance of property made to hinder, delay, or defraud either present or future creditors. New York’s Fraudulent Conveyance Law encompasses presumptive fraud as well. As a result, if a person makes a transfer of property for less than fair consideration that renders the person insolvent, the transfer is deemed presumptively fraudulent, regardless of actual intent. The practical implication of this law is that where one has debts or is aware of a potential debt or judgment in the future, even if they transfer assets to an irrevocable trust, the creditor will nonetheless be able to collect the debt and attach the property transferred.

It is important to note one slight exception to the rule above: a Medicaid Asset Protection Trust (MAPT), which is a type of irrevocable trust, if drafted properly, will provide asset protection from Medicaid. Subject to certain Medicaid rules, assets transferred to a MAPT are not considered available to Medicaid both during life and after death.

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However, irrevocable trusts, or even revocable trusts, are more effective in providing creditor protection for the beneficiaries of the trust. By passing assets to your beneficiaries in further trusts with terms that limit principal distributions to your beneficiaries for their health, education, maintenance, or support (“HEMS”), your beneficiaries’ inheritance will be protected from their respective creditors and potential judgments.

Managing the potential exposure of your assets as a result of creditors and potential judgments can be challenging and involves many interconnected legal considerations. Thus, it is advisable to consult an experienced attorney to help navigate these issues.

Michal Lipshitz, Esq. and Dylan Stevens, Esq. are attorneys at Burner Prudenti Law, P.C. focusing their practice areas on Estate Planning and Elder Law. Burner Prudenti Law, P.C. serves clients from Manhattan to the east end of Long Island with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.