Asset Protection through Trusts
In this article, attorney Ryan Beasley and I will address the issue of how trusts can be used to protect property from the claims of creditors and predators.
Protecting Trust Property from the Claims of Creditors and Predators
In speaking of claims by creditors and predators against property held in trust, we normally hear about two major types of trusts, “Self-Settled Trusts” and “Third Party Trusts.”
Self-Settled Trusts are trusts created where the Grantor (the person who creates the trust) is also a beneficiary of the trust. A Third Party Trust, on the other hand, is one where the Grantor establishes a trust for beneficiaries other than himself or herself (for example, for his or her spouse, children, and/or other descendants). Georgia law does not look kindly upon efforts of Settlors (the terms Settlor and Grantor are interchangeable) to defeat the claims of their own creditors by creating Self-Settled Trusts.
For example, the Georgia Code states that “[during the lifetime of the settlor, the property of a revocable trust shall be subject to the claims of the settlor’s creditors.” O.C.G.A. § 53-12-82(1). If the Settlor creates a Living Trust and makes it Irrevocable, the creditors of the Settlor may reach the “maximum amount that can be distributed to or for the settlor’s benefit during the settlor’s life or that could have been distributed to or for the settlor’s benefit immediately prior to the settlor’s death.” O.C.G.A. § 53-12-82(2). Thus, even if the property in a Self-Settled Trust is placed in the hands of an independent Trustee with discretion, but not any obligation, to pay the assets back to the Settlor, the creditors of the Settlor can still reach the maximum amount that the Trustee could, in the full exercise of his or her discretion, pay to the Settlor.
After the death of a Settlor, “the property of a trust that was revocable at the settlor’s death or had become irrevocable as the result of the settlor’s incapacity, shall be subject to the claims of the settlor’s creditors to the extent that the settlor’s probate estate is inadequate” to pay the debts. O.C.G.A. § 53-12-82(3).
Thus, it is very difficult for a Settlor to transfer his or her assets to a trust that is Revocable (or Irrevocable but provides lifetime benefits to the Settlor) and put those assets beyond the reach of his or her own creditors.
Note, however, that Georgia law is far more favorable to a debtor who is a beneficiary of a trust (i.e., a debtor/beneficiary) in the case where the beneficiaries of such trust do not include the Settlor. Such trusts are called Third Party Trusts and include, for example, Testamentary Trusts that might be set up by a wife for her husband, children, and/or other descendants following her death.
In the next installment, we will explain in greater detail the Third Party Trust and the overlay of Georgia law as it balances the interest of creditors and the right of a person to leave his or her assets as he chooses.
David H. Dickey is a partner at Oliver Maner LLP and concentrates his practice in the areas of Estate Planning, Business Law, Business Entities, Probate & Estate Administration and Taxation. He can be reached by email at email@example.com and by phone at 912.236.3311.
Ryan Beasley is an associate at Oliver Maner LLP and concentrates his practice in the areas of Estate Planning, Business Law, Business Entities, Probate & Estate Administration and Taxation. He can be reached at firstname.lastname@example.org and by phone at 912.236.3311.