(Yahoo!Finance) - Trusts can provide certain benefits for estate planning, including asset protection. But can you sue a trust? It’s an important question to ask if you have a trust or plan to create one, are named as the beneficiary to a trust or are owed debts by someone who’s established a trust.
While a trust itself generally cannot be sued, the trustee can. Understanding when a lawsuit can be brought in connection with a trust is important for estate planning. Of course, getting estate planning help before you decide on a trust can preempt litigation later on; that’s where a financial advisor can be immensely helpful.
Trust Basics
A trust is a legal entity that holds and manages assets on behalf of one or more beneficiaries. The individual or entity responsible for managing those assets is called a trustee. Trusts can be revocable, meaning they can be changed or altered, or irrevocable, meaning the transfer of assets to the trust is permanent.
Trusts can be used in estate planning as a way to manage assets during your lifetime and beyond. Different types of trusts can be established for different purposes. For example, a special needs trust can be used to provide financially for the care of a special needs beneficiary. Charitable remainder trusts can be used for charitable giving.
Can a Trust Protect me From a Lawsuit?
The answer is that it depends. Say, for example, you have outstanding debts and are at risk of being targeted by a credit lawsuit. Whether you have a revocable or irrevocable trust can determine whether or not the trust can be sued.
With a revocable trust, you technically still own the trust assets. Even though they may be held in trust on behalf of your spouse, children or other beneficiaries, they belong to you as long as you’re living. In the case of creditor lawsuits, a creditor may be able to sue a revocable living trust for the collection of unpaid debts.
Irrevocable trusts are a different matter. When you transfer assets into an irrevocable trust, you give up ownership or control over them. That makes it difficult for a creditor to sue the trust and try to claim those assets since they technically no longer belong to you. Irrevocable trusts that are established specifically for the purpose of shielding assets from creditors are sometimes referred to as asset protection trusts.
It’s important to keep in mind, however, that creating an irrevocable trust for the purposes of avoiding creditors could become problematic. If a court determines that you created the trust fraudulently, the ruling could go against you which may leave your assets open to creditor lawsuits.
Can You Sue a Trust Directly?
Generally, no you cannot sue a trust directly. Again, that’s because a trust is a legal entity, not a person. It’s possible, however, to sue the trustee of a trust whether that trust is revocable or irrevocable. As mentioned, in the case of a creditor lawsuit the trustee of a revocable living trust could be sued. If you named yourself as the trustee of your revocable living trust, then you could face a lawsuit for debt collection.
You could also be sued as the trustee in connection with other types of civil lawsuits. Say, for example, that you transfer your vehicles into a revocable living trust. While driving one of those vehicles you cause an accident that results in the injury or death of another driver. The driver or their family could sue the trust for damages indirectly by suing you as the trustee.
When Can You Sue a Trustee?
Trustees bear a significant responsibility with regard to managing trust assets. They’re bound by fiduciary duty to manage the trust assets according to the wishes of the trust grantor and in the best interests of the trust beneficiaries.
So can you sue a trust if you believe the trustee is not carrying out their fiduciary duties? Yes, it’s possible. For example, say you’re a beneficiary of your deceased parents’ trust. You know that under the trust terms you’re supposed to receive a certain amount of money but the trustee has yet to make the payment. You could bring a lawsuit against the trustee for breach of fiduciary duty.
Likewise, trustees are prevented from self-dealing or using trusts assets for their own benefit. If you believe something like this is going on behind the scenes or that the trustee is actively stealing money from the trust, you could sue. You’ll need to be able to provide that the trustee has committed a serious breach of fiduciary duty.
Here are some other scenarios that might allow you to sue a trustee:
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You believe they acted negligently which resulted in financial harm to the trust or to its beneficiaries
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A conflict of interest exists that allows the trustee or someone they know to benefit financially
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The trustee is not acting impartially and instead appears to favor certain beneficiaries over others
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Assets are being withheld without any reasonable explanation from the trustee
If you believe you have grounds for a lawsuit against a trustee, you may want to talk to an estate planning attorney or a trust litigation attorney.
Suing a Trust vs. Contesting a Trust
Suing a trust and contesting a trust are not exactly the same. When someone sues a trust, it’s typically related to a specific claim for damages. So with a creditor lawsuit, for example, the creditor is trying to win a financial judgment to recoup money owed toward outstanding debts. When someone contests a trust, they’re challenging the terms of the trust itself.
Why would someone contest a trust? There are different reasons for doing so. For example, you might contest a trust if you:
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Believe that the trust grantor was coerced or otherwise subjected to undue influence in creating the trust
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Suspect that any unusual amendments made to the trust may be linked to financial elder abuse
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Think trust documents have been forged or fraudulently altered
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Otherwise believe that the trust is invalid in some way
You can contest a trust if you feel that you should have been included as a beneficiary or that you should receive a larger share of trust assets. But keep in mind this alone may not be enough to get a court to agree and force a change of the trust terms. Typically, there has to be a valid suspicion that the trust is somehow in violation of your state’s estate planning laws for a contest to be successful. You must also have legal standing to bring a claim, i.e. be recognized as an heir of the trust grantor.
Again, talking to an estate planning attorney or a trust litigation attorney may be helpful if you’re considering contesting a trust. An attorney can help you figure out if you have grounds to contest a claim and what you’d need to prove that claim in court.
The Bottom Line
Can you sue a trust? No, not directly, is the answer. But it is possible for a trustee to be sued in the case of creditor lawsuits brought against revocable trusts or lawsuits related to breach of fiduciary duty. Establishing a trust could help you to round out your estate plan but it may be helpful to talk to an estate planning attorney about what you need first and how a trust can protect your assets.
Tips for Estate Planning
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Consider talking to your financial advisor about whether a trust is right for you as part of your overall financial plan. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Will you have enough money to retire comfortably? SmartAsset’s free 401(k) calculator can help you determine whether you’re on track to retire on time.
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A trust is not a substitute for a last will and testament. If you don’t have a will, you may want to consider drafting one to avoid the risk of dying intestate. You can use a will to decide how your assets will be divided and name guardians for minor children. It’s easy to create a will online thanks to affordable will-making software programs. Some also make it easy to establish a simple trust though again, you may want to get advice from an attorney first.
By Rebecca Lake
