People cannot circumvent creditors by putting property in a revocable living trust. The creditors can still get a settlor's property in a trust while the person is alive. There is the misconception by some that because the trust is a separate legal entity from the individual, the creditors cannot get at the trust assets. However, this is not supported by law. This is because the person has complete control over the property, and the trust can be revoked at any time.
Further, during the settlor's life, the living trust does not have a separate existence for income tax purposes. The IRS treats the trust property the same as if owned by the settlor. The trust cannot be used to lower taxes. Besides income taxes, living trusts do not save on estate taxes.
This is compared to property placed in an irrevocable living trust. In an irrevocable living trust, the settlor is not able to change the trust. Creditors cannot reach the property owned by a bona fide irrevocable trust. The trust cannot be set up for purposes of defrauding creditors.
If you have any questions with regard to estate planning, please contact our office at 1-800-303-2964. Rinne Legal is located at 1990 North California Blvd., Walnut Creek, California 94596, with additional offices in Fairfield, Oakland, and Sacramento. Rinne Legal offers free initial consultations.
