Wesley Chapel, FL asked in Bankruptcy, Consumer Law and Estate Planning for Florida

Q: Will creating a trust for protection of personal assets also protect the beneficiary from a bad credit history?

As one slowly recovers from hard economic times (including the filing of a CH7 bankruptcy), which was discharged in 2019, one's personal credit history often takes much longer to recover. Things stay on their credit record long after the person has been declared "debt free," especially a bankruptcy (stays on for 10 years after the discharge). It makes it extremely difficult for a person to do things like open new checking accounts or apply for work, or rent an apt, or any thing like that which requires a credit check as part of the application process.

Would such a person, as they rebuild their credit rating, be able to shield themselves from the ill effects of that bad credit history by forming a trust in which they place their assets? Could that trust then obtain its own Tax ID number (FEIN) and use that number to open new checking accounts? Or, would an individual (most likely the trustee) acting as fiduciary need to use their own tax Id to open those accounts?

3 Lawyer Answers
Nina Whitehurst
Nina Whitehurst pro label Lawyers, want to be a Justia Connect Pro too? Learn more ›
  • Estate Planning Lawyer
  • Crossville, TN

A: There is such a thing as a self-settled spendthrift or asset protection trust, but many states do not allow them. Also, typically the settlor (you) cannot also serve as trustee of the trust. In other words, you would not have signature authority over the assets that you put in the trust. And, they can be quite expensive to form and to maintain. There are attorneys fees to form properly and then annual trustee fees to pay to keep them going. Finally, they cannot be used to hinder, frustrate or delay existing creditors.

To explore this further, you should schedule a consultation which an estate planning attorney in your areas who specializes in asset protection. The attorney might have other ideas for protecting assets that are simpler than a self-settled trust.

Phillip William Gunthert and Anthony M. Avery agree with this answer

Phillip William Gunthert
Phillip William Gunthert
  • Estate Planning Lawyer
  • Orlando, FL
  • Licensed in Florida

A: While you can accomplish some of your intended goals with proper planning, the use of a trust in the manner that you have inquired and proposed is not one of them generally speaking. Estate planning is for the purpose of trying to avoid probate and distribute your estate assets in the manner that you desire to whom you want those assets to go to potentially at various increments during life and or upon your passing. Creating asset protection is something you can accomplish via ownership with others, LLC formation, Homestead and other types of protected investments. While you can create some protections via a Trust in the manner you describe, you would not have control over assets or be the Trustee and the trust would have spendthrift and or other clauses to limit distributions potentially at the discretion of the independent trustee that has been designated that you would have no control over. Also, while your trust would get an EIN, it is not a way to establish credit in the manner you suggest, it is for filing taxes, and you would still have to have someone apply via their social security number if you are opening credit cards and or even bank accounts. You really will need to spend some time speaking with a Florida Estate Planning Attorney as well as a business asset protection attorney for additional guidance on creating protections.

James L. Arrasmith
James L. Arrasmith pro label Lawyers, want to be a Justia Connect Pro too? Learn more ›
  • Bankruptcy Lawyer
  • Sacramento, CA

A: Forming a trust can offer a means to manage and protect assets, and a trust can indeed obtain its own tax identification number (EIN) for banking and financial transactions. However, the trust's creation and operations won't directly shield you from the effects of your personal credit history. When you apply for personal credit, employment, or housing, your personal credit history will typically be reviewed, regardless of the existence of a trust. Trusts are generally used for estate planning, asset distribution, and sometimes privacy benefits, not for improving personal credit issues. As a trustee, when you open accounts for the trust, you may use the trust's EIN, but your role and credit history could still be relevant if you provide personal guarantees or if the trust's activities are closely tied to your personal finances. It is essential to maintain separation between personal and trust activities to avoid issues with creditors or legal challenges.

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