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Asset Protection for Your Heirs

By Libby Banks, The Law Office of Libby Banks, PLLC
The Law Office of Libby Banks > Asset Protection  > Asset Protection for Your Heirs

Asset Protection for Your Heirs

I was asked recently by a client whether the revocable living trust we were creating for him would protect his assets from his creditors. The answer is no. While the revocable trust is a great estate planning and probate avoidance tool, it is not an asset protection trust. Because you still have full control over the assets in your revocable living trust, the law recognizes that they are your assets, and your creditors can get to them in the same way as if they were in your personal name
and not in your trust.

I went on to tell him that while his revocable trust didn’t protect him from his debts, we could structure the inheritance he’s leaving to his children to protect
them – and not just from potential creditors. How do we do that? Instead of your trust saying that your beneficiaries get their inheritance outright (i.e., they get a
check and do with it what they want), your trust can direct that each beneficiary receives his or her share in an irrevocable trust.

Trusts Can Keep an Inheritance Out of the Hands of Creditors

These beneficiary trusts do provide asset protection for the trust assets. An outright gift of the inheritance can result in a beneficiary’s creditors snatching all your
hard-earned money. Here is a real-life example (details changed to protect confidentiality): Son started a business, but in the economic downturn of 2008 the
business failed. He filed bankruptcy. A month after filing his Mom died, leaving him everything in an outright distribution. It was all his. Except it wasn’t his.

Instead, because he had filed bankruptcy, it all went to his bankruptcy trustee. Had Mom given him the assets in trust, he might have completed the bankruptcy
without using the assets in the trust and, after the bankruptcy, the assets in trust could have given him a fresh start.

Trusts Can Protect an Irresponsible Heir from Himself and Still Provide for His Welfare

My client mentioned that his son had addiction issues in the past, and while his son has been clean and sober for a while, he still had concerns.

I mentioned that when the trusts for beneficiaries are created, the irrevocable trusts can provide protection for beneficiaries who might not manage the inheritance well. This works not only for those with addiction issues, but also for children (or the child’s spouse) who are spendthrifts, very bad with money, or just too young to handle the sum they are inheriting. Leaving the money in trust doesn’t mean you don’t provide for them. The trust will allow for discretionary distributions to them for their health, education, maintenance and general welfare.

Giving the inheritance in an irrevocable trust allows your beneficiary to benefit from the assets but doesn’t give them unlimited access to spend on whatever they
please.

Trusts Can Protect the Inheritance in Case of Your Beneficiary’s Divorce or Death

My client liked the idea of the irrevocable trust and asked me about protecting his daughter’s inheritance from her husband. The marriage was a bit rocky, and he was concerned about what would happen if she decided to divorce him after getting her inheritance.

I explained that if a beneficiary is divorcing, or has a rocky marriage, leaving the inheritance in trust can assure that your beneficiary keeps the inheritance and
doesn’t lose part of it in a divorce. The assets held in trust won’t be divided up, because the inherited trust is separate property that belongs only to the beneficiary and not their spouse.

An outright distribution of the inheritance, however, is likely to be commingled in accounts held by both the beneficiary and their spouse. The assets then may be
considered community property and some portion will go to the divorcing spouse.

Another advantage my client liked was the fact that we could state in the trust that when his daughter passed away the remaining assets in the trust would go to his grandchildren. If his daughter had a healthy marriage and put the inheritance in her name with her husband, what happens when his daughter passes away? If her husband remarries, there is a real possibility that the assets may go to the new wife when he dies and not to the grandchildren. Providing for the inheritance to be held in a trust for his daughter, and on her passing for her children, can help prevent this scenario.

My client was very happy to be putting in place protections for his children to assure his hard-earned money would benefit them the way he hoped. If asset protection planning for your heirs is something you would like to discuss – or if you are interested in the revocable living trust for your estate planning, we are glad to assist you. Visit my website at www.libbybanks.com or call 602-375-6752 for your free initial consultation in person or via Zoom or phone.

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