Legal Insights

LEGAL TEAM SPEAKS 

Ronald H. Jarashow, Esq., Robert R. Smith, Esq., and Gilda O. Karpouzian, Esq., are practicing lawyers in Maryland with more than 30 years of experience.  Their answers are based on assumptions that Maryland law applies.  Mr. Jarashow and Mr. Smith can be contacted at 410-268-5600 or info@fjbslaw.com and Ms. Karpouzian can be contacted at 410-280-8864.

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Dear Legal Team: 

We’re thinking of putting everything we have into a trust for our four grown children, and if I understand this correctly, we will be able to continue to enjoy what we have until our demise at which point our children will receive what’s left.  My question is, if we get sued (my husband owns his own small business), can they go after the trust??                                                             Trust Creator/Asset Protector 

Dear Trust Creator/Asset Protector: 

          Your question asks about two separate and related concepts concerning the creation of a trust and using those trust assets during your lifetime and the desire to protect the trust assets from possible business debts.  You are on the right track, but the issues are more complex. 

          Trusts basically come in two types, revocable and irrevocable.  Both accomplish the goal of permitting you to use the assets during your lifetime for your personal benefit.  After your death, the beneficiaries of the trust (your children or whoever you designate in the trust documents) will receive what is left in the way you describe the distribution in the trust documents.  Both forms of trust avoid probate (court proceedings to deal with your estate), assuming that you have placed all your assets into the trust.  

          A revocable trust, however, does not provide any asset protection where an irrevocable trust does protect your assets from creditors.  There are various tax implications for each of the types of trusts that we are not addressing in this article.  As the names of the trust imply, a revocable trust could be revoked by you if you desire to change the way you want the assets used during your lifetime or distributed after death.  An irrevocable trust, however, is established and not changeable by you once it is set up and you transfer your assets into the ownership of the trust.  An important point in planning a trust is deciding what assets you will actually place into the ownership of the trust.  We have seen cases in which individuals do the estate planning and sign the trust documents, but then fail to transfer to the trust all or even the significant assets, thereby defeating the overall estate plan and purpose of the trust.  You should work with an estate planner or estate attorney to carry out the plan and transfer the assets that accomplish your intent. 

          The second part of your question suggests that part of your motivation for establishing a trust is because of potential liability arising from your husband’s business.  An irrevocable trust does take your property out of your personal ownership and transfer it to the trust, so the assets are protected from both of your creditors – not only your husband’s business creditors.  Even without an irrevocable trust, however, your assets may be protected from your husband’s business debts.  Depending upon the laws of the state in which you live, assets owned by a husband and wife jointly as tenants by the entireties (right of survivorship) are often protected from a personal debt that arises for one spouse or the other.  In addition, the structure of your spouse’s business may give him personal protection from debts of the business.  This is the classic reason for setting up either a corporation or a limited liability company or some other form of a business that protects the owners from liabilities of the business.  The normal rule is that an employee, stockholder, director or officer of a corporation or a limited liability company does not have personal liability for the debts of the company.  There are exceptions to this under state law.  Therefore, if a primary motivation for your question is a concern about liability arising from your husband’s business, you may not need an irrevocable trust to accomplish the goal of protecting your personal assets.  An experienced business lawyer can explain to you the circumstances under which an individual involved in the business may become responsible for the debts of the company. 

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Dear Legal Team: 

My mother has run up a huge amount of debt, and although she seems to be of sound mind, physically she is declining.  My concern is that I’m her sole beneficiary.  Will I also inherit what she owes?  I’m baffled as to how she’s been able to accumulate so much debt and I know that her estate won’t even come close to covering it. Needless to say I’m very concerned.                                                                      Estate-Daughter

Dear Estate-Daughter: 

          Creditors who are owed money when someone dies become creditors of the deceased person’s estate.  There is a procedure and time limit for those creditors to file those claims in the estate proceedings.  These debts get paid from the estate, if there are assets in the estate.  The debts or claims do not become the personal responsibility of the beneficiaries or heirs of the estate. 

          In any estate, before any funds are used to pay creditors, there are certain expenses that will be deducted from your mother’s estate, such as funeral expenses, taxes, probate fees, bond costs, advertising costs, etc.  These are just some of the expenses that may be present in every estate.  Once customary expenses are deducted from the gross estate, then the claims are considered for payment before assets are distributed to you as sole beneficiary. 

          Whether a creditor is paid in full depends on the amount of the estate assets (net estate available for distribution).  If the estate assets are not enough to cover all of her debts, then each creditor receives an equal percentage of the debt owed along with all other creditors.  If the estate has no funds (or no estate is opened because your mother has no assets), then the creditors may not receive any payment.  

          While your mother is still living, you should be aware of whether you agree to be responsible to pay your mother’s debts.  If you sign documents agreeing to be personally responsible for her debts, then your agreement to pay will continue after your mother’s death.  This type of situation may arise, for example, if you or your mother try to get services or buy something and the provider refuses to do so unless you also personally sign to be responsible for the debt. 

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This site provides information about the law. Legal information, however, is not the same as legal advice about your specific circumstances. We try to be accurate and useful.  We strongly recommend that you consult a lawyer to find out what is appropriate to your particular situation. We are not giving specific legal advice to you.  These answers do not create an attorney-client relationship.

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