Yes, a person can still setup a trust. However what he cannot do is prevent his creditor from levying on that asset. California has a “fraudulent conveyance” law and does not permit a person to set up a trust for his own benefit and shield or protect the assets from his present or future creditors, particularly where that a person has an existing judgment or claim against him. The creditor will be able to penetrate through a “self-settled” trust by bringing an action in court under the fraudulent conveyance law asking a judge to set aside the conveyance into the trust and making the money subject to levy for a judgment. It does not have to be an actual court judgment that creates this right. It can also be an existing claim, meaning an occurrence or an act that gives rise to an obligation even if it is not reduced to a judgment. Such claims are protected under the fraudulent conveyance laws.
In California, there are restrictions on a person’s ability to transfer assets into a trust and protect from creditors even if he does not have an existing claim or judgment against him but is merely anticipating future claims that may arise. California limits a person’s ability to protect his assets in that situation because of the public policy that a person should not be able to insulate himself against debts that he incurs by simply changing the form of ownership of his assets and yet retaining the benefits of those assets. A person can do so more effectively in other states such as Nevada which recognize asset protection trusts.
Can a Person Create Exempt Assets by Putting Them into a Retirement Account?
Yes, you can. If someone lawfully puts money into an IRA or 401k account, generally speaking, it will be exempt from creditor’s claims for the reasons stated above. Assets that go into a retirement plan or an IRA are going to be protected because of the special protections that are provided for those types of assets. However, the ability to transfer assets into an IRA or a 401 k account are not unlimited and are subject to federal limitations.
Can the Assets or the Trust Pass to Other Family Members if There Are Outstanding Creditor Claims Against the Creator of the Trust?
It depends on the type of trust. If it is a revocable living trust, which is the standard type of trust that a husband and wife will form for their benefit during their lives and then pass to their children at their death, by law, the trustee of those trusts has to pay the husband’s and wife’s debts from the trust assets before they distribute the balance to the kids. If it is a claim against a beneficiary, then assets in the trust can be protected against the beneficiary’s creditors ’claims by adding spendthrift language in the trust, but remember that trust assets are only exempt while they are in the trust, not after they’ve been distributed to the beneficiary.
Distributed assets become subject to the beneficiary’s creditor’s claims but often times if a beneficiary has creditor claim against him, the trustee may simply elect not to make any distributions to him because he knows the creditor will grab the asset once it passes to the beneficiary. Thus, a trust can act as an asset protection device for a third party beneficiary with a claim against him. It is almost always better to hold assets in that type of trust. If they are held directly by the beneficiary, the creditor can simply levy on them and will not have to go to court in order to penetrate through the trust.
The requirement of going to court can act as a disincentive for creditors to chase the trust assets because they have to hire an attorney and there is expense and delay involved and so often simply having a third party spendthrift trust in place will protect the assets and discourage people from making the effort to try to attack it in court.
For more information on Setting up a Trust with a Judgment, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (916) 635-0302 today.