Frequently I hear this question: “I am confused on whether or not my Revocable Family Trust that I set up with my wife provides any creditor protection. My neighbors tell me that it does but my CPA says it doesn’t – who is right?”
People must understand that there are numerous types of trusts that are used for different purposes. Some are designed to save taxes, some designed to give creditor protection and some are simply designed to designate who your heirs will be when you pass away. But, generally speaking you can divided trusts into two main categories, Revocable and Irrevocable. And from that, creditor protection is also dependent on whether or not the Grantor (the creator of the trust) is also a potential beneficiary. In most states, including Arizona, two factors must be present for the trust to provide creditor protection. First, the Trust must be irrevocable. And Second, the Grantor of the trust cannot be a potential beneficiary in any degree. So, with respect to the typical Revocable Family Trust, it does not offer any creditor protection. It fails both tests. On the other hand, if I set up an Irrevocable Trust for the benefit of my wife and my kids, that would satisfy both tests and would afford creditor protection. This is called a Spousal Gift Trust.