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Will a living trust provide protection from creditors?

A common question that estate planning attorneys receive about living trusts is whether or not the property inside a living trust will be protected from creditors. Unfortunately, the straightforward answer to this question is no.

One of the best ways to illustrate how property held within a living trust is not protected from creditors is to use the example of a home. If the home is bequeathed to children as beneficiaries within a trust, then creditors could seek payment of debts in an amount up to the home's value -- that is, if the creditors can find out who inherited the home.

Although trusts do provide confidentiality, title laws regarding real estate ownership fall within the public record, and this is a way that creditors can find out who has inherited a piece of real estate. Trusts do provide a layer of protection from creditors because their confidentiality makes it more difficult to track down real estate heirs as compared to a will, which is a matter of public record. However, with assets like real estate, that protection is not complete. The process of title searching is a long and arduous one for creditors, but if the amount of the debt is high enough and the value of the real estate is high enough, it may be worth the creditors' time.

Kentucky residents are often hold a lot of misconceptions when it comes to trusts and how the law applies to them. As such, it is advisable to consult with an attorney before creating a trust document, and also during the trust planning process in order to ensure that the trust is viable and appropriate for the estate planner's circumstances.

Source: FindLaw, "Living Trust Information," accessed March 18, 2016

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