Sometimes you may hear “revocable trusts provide no asset protection” — however, this is only half-true.
Trusts are powerful devices. In fact, even “revocable” trusts can afford valuable protection. Consider the case of Frank and Geryl Pearl, as reported in a recent Forbes article titled “Pearl — Transfers to Revocable Trusts Were Not Fraudulent Transfers As To Creditors Of The Settlor.”
Essentially, the Pearl case illustrates the magic of a revocable trust. Frank, upon a cancer diagnosis, moved his business assets under a revocable trust, which meant that he was still effectively accountable for everything because the “revocable” trust was still under his control for all intents and purposes. Frank arranged for the bank to name him personally as guarantor to the business loans. Geryl was named beneficiary to the trust. When Frank died, the assets in the trust that were otherwise entirely accessible to the bank and other creditors passed over to Geryl and were completely inaccessible to the creditors. Poof! How did this happen? As summarized by Forbes:
“It should not be overlooked that a revocable trust can provide near-absolute asset protection to the beneficiaries of the trust after the settlor dies, so long as the trust is well-drafted, has only discretionary distribution, and a solid spendthrift clause. What is no protection for the settlor almost magically turns into fantastic protection for beneficiaries after the settlor’s death. A beneficiary’s interest is simply not acceptable by creditors except in the most extreme cases, such as unpaid child support or if the beneficiary commits a violent crime, etc.”
The Pearl case is an interesting one for those planning their estates (and their creditors). To learn more you can consult the Forbes article, the case itself (as cited in the article), and consult with competent legal counsel before relying on this case in your own planning.
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Reference: Forbes (September 30, 2012) “Pearl — Transfers to Revocable Trusts Were Not Fraudulent Transfers As To Creditors Of The Settlor”