Does a revocable living trust protect assets in a lawsuit? The short answer is no. Unfortunately, a revocable living trust does not protect your assets from a personal injury lawyer, creditor, or anybody else looking to sue you.
Instead, an umbrella policy is what protects your assets in a lawsuit. Updating your umbrella policy for more coverage after a bull market is a smart idea. As your net worth has grown, you need to have a larger umbrella policy to protect your assets.
Here are some thoughts from a tax controversy attorney on whether a revocable living trust protects your assets or not from a lawsuit.
Revocable Living Trust To Protect Assets In Case Of A Lawsuit
I am an attorney. Without providing you actual legal advice (please speak with your attorney), I will say this as a general statement — a revocable trust is worthless for protecting assets. A revocable living trust is more of a probate and estate issue. And I say this as someone who also has a revocable trust.
Just think of it this way: (1) where do you report your trust income? Its on your personal tax return and (2) how easy is it for you to move assets in and out of a revocable trust? The answer, easily.
As a result, any halfway competent personal injury attorney would be able to get at those assets. While there may be a tad more work involved (I have no idea, I dont do PI work), those assets are still very much at risk.
Related: Estate Planning Basics
Get An Irrevocable Trust To Protect Assets From A Lawsuit
An irrevocable trust on the other hand is good for asset protection. However, the downside is that once the assets are put in the trust, they become trust assets.
Now, there are ways to “decant” (yes, that is what it is called) an irrevocable trust to get the assets out. However, that is quite a pain, which is why the trust was irrevocable to start with.
I am sure a good personal injury attorney could get at some of these assets. This is especially true if there is any co-mingling or non-trust use of the assets. But it would be harder.
Personal injury lawyers will almost always sue for “policy limits.” Now, I do not know how much that actually matters because they rarely receive that amount.
Since most umbrellas seem start at $1M (at least that’s what I saw when I looked many years ago), I would suspect most people are covered simply because most injuries are not $1M+ injuries.
That said, you may want an amount more that this in the event you/your kid kills or seriously maims someone, someone ODs on your property, etc. In this case you may be glad you are “over-insured” because the actuary numbers will control the victim’s “value” as well as potential medical costs.
As a result, an attorney/victim may be more than willing to sue for more than the policy limits (ie a judgment of $5M but you only have a $1M policy). Keep in mind that is not to say this money is collectible, but having a judgment over your head is likely worse than the risk of being over-insured…if that makes sense.
Related: The Importance Of Having A Death File
Get Umbrella Underinsured Motorist Coverage (UIM)
Here is some feedback from another Financial Samurai reader, who is an attorney.
I’m an attorney and strongly recommend purchasing an Umbrella policy that also has umbrella underinsured motorist coverage (UIM). This gives you umbrella UIM protection above the regular UIM limit you have on your policy.
Normal umbrella coverage only covers the injuries of people you injure through your negligence. The more likely scenario is that you and your family are injured by someone else.
The average liability coverage that driver’s have is only $50,000 and many drive without insurance. Assume your family of three is hit by a driver with only $50,000 in coverage. The driver kills the main bread winner and seriously disabling the other two.
In a normal scenario, you would be limited to recovering the $50,000 and whatever UIM coverage you have on your regular policy, say $300,000. A total recovery of $350,000 would not even begin to cover the lifetime of lost earnings for the deceased and the daily in home nursing care for the disabled.
Umbrella UIM would kick in above the $350,000 and provide your family another million or more in coverage. As an attorney, the most common scenario is that there is rarely enough insurance coverage to cover the losses ina serious accident.
Conduct Yourself Carefully
It's too bad a revocable living trust does not protect your assets from a lawsuit. The best way to protect yourself is to drive carefully, take your time, and treat people well.
In a lawsuit, you just never know what may happen. Get UIM to protect yourself as much as possible. A revocable living trust is for estate planning purposes. Again, please consult a lawyer for professional legal advice.
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