It's The Law
Creditors Can Reach Revocable Trusts
I want to protect my assets from creditors. I am thinking about creating a revocable living trust and transferring the assets to the trust with me as trustee. Is that a good idea?
Creating a revocable trust can be a good idea for probate avoidance, maintaining privacy and for providing a person or entity to manage financial assets in the event of incapacity. It is a myth that these trusts protect assets from creditor claims.
Most revocable living trusts are created by a person ("settlor" or "grantor") who creates the trust and serves as the initial trustee. The trust provides that the trustee has complete discretion in dealing with trust assets so the settler can deal with the assets just as he or she did before transferring them to the trust.
Section 736.0505 of Florida Statutes makes it clear that property of a revocable trust is subject to the claims of the settlor's creditors during the settlor's lifetime unless otherwise they will be exempt by law if owned directly by the settlor. The statute goes on to provide that even if the trust is irrevocable, a creditor of the settlor may reach the maximum amount that could be distributed to or for the settlor's benefit. The statute also allows creditors of anyone who has power to withdraw assets from the trust to reach the assets subject to the power. The statute embodies public policy disallowing one to put property in trust for one's own benefit to escape one's creditors.
Creditors of the settlor can also reach trust assets after the settlor dies. For over two decades, Florida statutes have provided that assets of revocable trusts are to be made available to pay creditor claims in probate, when the probate assets are insufficient. Over the years, the statutes have been modified to make that duty even clearer, with procedures to more directly involve revocable trusts in the probate process.
The statutes provide that if assets of a probate estate are insufficient to pay the expenses of administration and the decedent's creditors after paying all statutory entitlements and devises other than residuary devises, the personal representative is entitled to payment from the trustee in the amount the personal representative certified in writing to be required to satisfy the insufficiency. The statutes also make provision to ensure the trustee is aware of probate, which is intended to stop the trustee from distributing trust assets before dealing with any claim by the personal representative of a probate estate. Those provisions include classifying the trustee of the trust as an interested person.
An interested person is entitled to notice of probate proceedings and to participate in probate. Notice of probate must be served on both the trustee and each qualified beneficiary of the trust. A qualified beneficiary is a living beneficiary who would be entitled to distribution of trust income or principal at virtually any time. In addition, the statutes provide that any portion of a trust to which the now-dead settlor had, at death, a right to amend or revoke a trust and regain principal as an asset or withdraw or appoint principal of the trust to or for his benefit is liable for the expenses of administration of the settlor's estate to the extent the estate lacks funds to pay them.
Creditors of a decedent cannot pursue claims directly against the trust. They must file a timely claim in probate and, if necessary, pursue the claim so the personal representative seeks payment from the trustee of the trust. If the claim is not filed within 2 years of the decedent's death, it is barred by Florida's 2-year time limit for claims against a decedent.
Per the Probate Code, if a claim is not paid by the personal representative, the creditor must file an independent lawsuit against the estate. Lawsuits can be expensive, so most creditors want to determine if there any assets available and if there are any other claims against the assets to assess likelihood of recovery. To help creditors in that regard, Florida Statutes mandate that trustees of these trusts file a Notice of Trust with the Clerk of Court, identifying the trust, trustee, and the trustee's address. The notice does not identify trust assets, but at least places creditors on notice that there may be something available to pay claims other than what is disclosed on the estate inventory. Since it is unlikely a poor person would create a revocable trust, notice of the existence of the trust in most cases means there will be something of value in the trust.
Revocable trusts can be a very effective estate and life planning tool. They are not an effective creditor avoidance method. There are other methods available to protect assets from potential claims of creditors. I suggest you discuss options with an experienced attorney.
By: William G. Morris, Esquire
William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.
Questions for this column can be sent to: William G. Morris, e-mail: email@example.com or by fax, (239) 642-0722 or
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