Pitfalls of Trusts

Two common pitfalls that should be avoided when creating an irrevocable intervivos trust are (1) not making sure that there are no strings to the assets that are transferred into the trust and that the grantor has no power to revoke, rescind or amend the trust and (2) not ensuring that the grantor has no authority as to how the trust's property is to be managed or invested.

The primary grantor cannot be the trustee, nor should their spouse, relative or personal friend. Courts closely examine relationships between the grantor and trustee to determine whether the trustee is an alter ego of the grantor and unless the trustee is completely independent, the courts can ignore the trust and creditors can claim trust assets. A corporate trustee (such as a bank or trust company) would not be considered an alter ego and are preferred choices for trusteeship.

The disadvantages of the irrevocable trust influence many to choose other methods of Asset Protection and illuminate the popularity of limited partnerships and LLCs, both of which provide excellent Asset Protection, are fully revocable, and permit owner control of assets.

Revocable trusts (particularly the living trust) are much more common than irrevocable trusts and can assist in estate planning, but are ineffective at Asset Protection. Creditors can easily claim assets in a revocable trust as they could against any individual.

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