There are many good reasons to create a living trust. The most common reason is to shield your assets from the probate process. In other words, assets you place into a trust do not pass under your will. The Florida probate process–i.e. the part of your estate subject to your will–is a matter of public record. But trusts are generally private, so for the most part nobody outside of your family or any beneficiaries designated in the trust need to know anything about it.
But one thing that you need to keep in mind is that revocable living trusts, the type of trust most commonly used in estate planning, are not a magic shield that will protect your assets from creditors. Since assets in a living trust still remain effectively under your control–as you can revoke the trust at any point during your lifetime–your creditors can go after them. And you cannot use a trust to “hide” assets in the hopes they will not be discovered.
Florida Woman Faces Racketeering Claim After Allegedly Using Trust to Hide Assets from Husband's Creditor
A recent decision by a federal appeals court offers an example of what can go wrong when you do try to hide assets via estate planning. This particular case, Al-Rayes v. Willingham, involves a Florida couple who owe one of their creditors nearly $26 million. The original lawsuit, filed in 2006, alleged the husband of the couple defrauded the creditor “over the course of many real estate transactions,” according to court records. The creditor eventually obtained a $25.7 million judgment, of which he has only managed to collect roughly $40,000 in the intervening years.
The creditor filed the present lawsuit solely against the wife. He maintains the wife “conspired” with her husband to hide their assets in violation of federal racketeering laws. Among other acts, the creditor alleged that when the couple filed for bankruptcy–presumably, to obtain a discharge of the creditor's judgment–they failed to inform the court that the wife created a living trust and transferred their condo into it “while reserving a life estate in the condo for herself–and for her husband.”
The U.S. 11th Circuit Court of Appeals, reversing a trial judge's earlier ruling, said the creditor could proceed with his racketeering claims. Racketeering (or RICO) charges require proof of an “association-in-fact enterprise,” which the U.S. Supreme Court defines as a “group of persons associated together for a common purpose of engaging in a course of conduct.” The appeals court said that even though the couple in this case had a preexisting personal relationship–their marriage–that did not prevent a finding that they formed an association-in-fact enterprise for purposes of defrauding the creditor out of his judgment.
This is admittedly an unusual case of someone allegedly going to great lengths to hide assets from a creditor. But the underlying message is still important. Trusts are not a tool for breaking the law or avoiding legitimate obligations. If you need further advice or guidance from a Fort Myers estate planning attorney on how to properly create and use trusts, contact the Kuhn Law Firm, P.A., at 239-333-4529 today.