We are frequently asked whether trusts protect assets from the settlor's (i.e. trust owner's) creditors. I previously posted that revocable trusts do not protect assets from from the settlor's creditors. So, what about irrevocable trusts?

The answer is that irrevocable trusts will protect the settlor's assets from creditors -- but with certain limitations. Specifically, Michigan law provides that creditors may only reach the assets of an irrevocable trust up the maximum amount that can be distributed to or for the settlor's benefit. Therefore, even if the settlor is not the trustee, creditors may reach the maximum amount that could be distributed to the settlor according to the terms of the trust.

Asset protection with trusts is the same as in most other scenarios -- if the debtor can reach an asset, then his or her creditors can reach it too. As a result, the most cost-effective asset protection is usually achieved with appropriate amounts of liability insurance.

Reference: MCL 700.7506(1)(c)