Over the holidays I was asked the following question:

 

“I have a revocable trust as part of my estate plan. After I signed the trust I transferred my certificates of deposit into the trust. Are my CDs protected if I get sued?”

 

This is a question that I’m asked often so I thought it would be a good one to answer in this column.

 

When you transfer your property into a revocable trust, the transfers are actually made with strings attached. You are not completely giving up all ownership of the property—even though you transfer the assets to the trustee of your trust. The transfers are not completed because you have reserved the right to revoke your trust, in its entirety, at any time before you die. If you do revoke the trust, ownership of the property would revert back to you. In a sense, you’d be back where you started, before you set up the trust. By reserving the right to revoke your trust, you still retain some ownership of the property for tax purposes. You never give it away completely.

 

Since you still have an ownership interest in the property, the assets in the trust can be reached by your creditors. That includes anyone who sues you and wins.

 

But don’t despair, that’s not the end of the story. Even though the trust won’t protect you from creditors, in Texas, some assets are protected by state law. It doesn’t matter if the assets are owned by you, as an individual, or if you’ve transferred them to your revocable trust. The result is the same—creditors can’t touch them. That doesn’t mean that the debt you owe will magically vanish. It just means that your creditors can’t get paid from these particular assets.

 

In Texas there are four categories of assets which are protected to some extent from creditors. They are:

 

1. Your homestead. Up to 10 acres in an urban area or 200 acres in a rural area, regardless of value;

 

2. Personal property and current wages. Up to $60,000 ($30,000 for a single person) in property plus wages for personal services;

 

3. Life insurance and annuities. Even the cash value of whole life policies; and

 

4. Retirement plans. Pensions, profit-sharing plans, 401k & 403b plans, IRAs, HSAs and 529 plans.

 

Bank accounts (including CDs) do not fall into any of the four categories.  They are considered cash and, therefore, available to your creditors.

 

However, cash accounts can be converted into one of the four categories of assets that are protected. For example, you could use the cash in the CDs to pay down the mortgage on your home, purchase life insurance or an annuity, or deposit “make up” contributions to your IRA (if you are still young enough to do so). But don’t try this approach if you already owe someone money. If you try to hide assets from existing creditors, it’s fraud.

 

Another idea to try if you’re concerned about lawsuits would be to add an umbrella policy to your homeowners or auto insurance policy for additional liability protection. If you have an unusually high exposure to lawsuits I recommend that you contact an attorney in your area that specializes in asset protection. They can offer you some estate planning options that are beyond the basics.

 

Disclaimer: This column answers a specific legal question asked by an individual in Texas. The answer may or may not match your individual situation. Be careful not to treat this column as specific legal advice, as it may not meet your individual needs. It may give you a solid basis for discussion with your own attorney. You should consult with your personal attorney before you take any action on this or any legal issue. Also, please be aware that laws change, so this column is valid only as of the date it was published. This communication does not create an attorney-client relationship between the author and the reader.