Can a Trust Be Sued – Land Trusts Myths for Asset Protection
Can a Trust Be Sued – Why Land Trusts Cannot Hide Your Assets
The response to “Can a Trust Be Sued?” question has to be answered with reply of, anyone can sue anyone or anything at anytime, but the real question should be, if it gets sued will it hold up in a court. The right kind of trust, with the right trustee, written the right way, and with assets that are transferred properly will hold up. However, simply put, a land trust is a “revocable” living trust with unique features when it comes to “hiding” the true owner of property in the trust. (*Land trusts can also be irrevocable trusts which could provide terrific asset protection due to the fact that the client no longer owns the property. Clients use land trusts to keep the property in their possession and hide them not to give assets irrevocably out of their estate (which may have gift and income tax consequences)).
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You’ll know that I get disgusted when I hear “asset protection” advisors tell clients that a good way to protect assets is by hiding them. There is NO legal way to “hide” assets. Having said that, land trusts are sold on this very concept.
Because asset protection is such an important topic today, marketers have picked up on this and are heavily marketing land trusts as asset protection tools. Why? To generate legal/administration fees. The problem is that a client or advisor reads that land trusts can be an affective asset protection tool and blindly jump in to use them not knowing that there is no real asset protection provided.
Can a Trust Be Sued: The Problem with The Land Trust?
As stated above, a land trust is a “revocable” trust. Asset protection 101 is that revocable trusts provide NO asset protection from creditors. For example: if Dr. Smith has a Christmas party at his house where he is serving alcohol and someone drinks too much and drives home and gets into a terrible car accident killing three people in another car, Dr. Smith is going to be sued. As a general statement, ANY assets in his own name or ANY assets in a “revocable” living trust will be at risk to the lawsuit that will ensue.
The Sale’s Pitch of the Land Trusts
The sale’s pitch with land trusts is that everyone should have their real estate in a land trust because when a plaintiff suing you (or thinking of suing you) does a search to find out what assets you own, they will not be able to “find” the assets you own in a land trust because they are affectively “hidden.”
I found one website which gave an example of a client getting in a car wreck where the client was sued for $3,000,000. The client had $1,000,000 of auto insurance and because the client had his house in a “land trust” the plaintiff’s lawyer was not able to find the house and therefore, settled for the $1,000,000 of insurance coverage instead of going after $3,000,000 in assets.
The above example is absolutely absurd and one of the reasons of the importance of this newsletter to inform you what is reality. Remember that I had several people e-mail me and basically tell me that they thought land trusts would “asset protect” their homes. Land trusts technically provide NO asset protection.
Can a Trust Be Sued: “Hiding Assets” with a Land Trust
Land trusts only temporarily hide your assets so that IF a personal injury attorney does a search to find your assets, the attorney will not be able to do so from an initial cursory search. In the car crash case, the client is going to be sued and the assets owned by the client will be found.
Isn’t a land trust better than nothing? I suppose. If having real estate in a land trust will help your clients sleep at night, than have them use us a land trust IF and ONLY IF they are coupled with other asset protection tools such as the UltraTrust® irrevocable trust (the best asset protection tool in my opinion), Limited Liability Companies, Family Limited Partnerships, etc. The problem with the way land trusts are pitched is that they give the client a false sense of security that the land trust will “protect” the assets in the trust. Again, land trusts provide NO asset protection from creditors.
You need to understand that in the “real world” what will happen with a lawsuit is that a personal injury attorney will file suit and then take the deposition of the person being sued. At that deposition, the attorney will simply ask the client to list off their assets. While it may be premature and objectionable, in a deposition the question will be answered, the defendant will have to disclose assets in a land trust and the objection will be noted. Again, there is no legal way to hide assets.
Conclusion of the Asset Protection of Land Trust
In my opinion, land trusts are not very useful when it comes to “asset protection.” If you use one, make sure the asset(s) being transferred to the trust are already owned by a separate entity which provides “real” asset protection. The bottom line is that land trusts do not protect assets notwithstanding what the marketers of the topic will tell you. Can a Trust Be Sued? Absolutely, and if it’s a land trust you choose to use, then don’t expect it to hold up in court.
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