Asset Protection for Your Heirs

I am often asked whether the revocable living trust we use as the cornerstone of our estate plans provides asset protection – protection from the creditors of the person creating the trust. The answer is no. While the revocable trust is a great estate planning and probate avoidance tool, it is not an asset protection trust. When you create this trust, you still have full control over the assets in the trust. Because of this, 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.

However, you can help your beneficiaries out by protecting their inheritance with a beneficiary asset protection trust. How do we do that? Instead of your trust saying that your beneficiaries get their inheritance outright (meaning the trustee simply writes them a check and they do with it what they want), your trust can direct that each beneficiary receives his or her share in a protective trust.

Protective 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, his inherited assets, safely ensconced in his trust could have given him a fresh start.

Protective Trusts Can Protect the Inheritance in Case of Your Beneficiary’s Spouse, and Divorce or Death

Many of my clients like the idea of the beneficiary protective trust, especially after I mention that the trust can protect a beneficiary’s inheritance from his or her spouse. If a beneficiary has a marriage that’s a bit rocky or a spouse who is a spendthrift, you may worry about what would happen to the inheritance. If a divorce happens, will the inheritance end up in part in the ex-spouse’s name? If the spouse has his or her way, will it get spent frivolously instead of being used wisely?

If your 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, belonging only to the beneficiary and not her spouse. An outright distribution of the inheritance, however, is likely to be commingled in accounts held by both the beneficiary and his spouse.

The assets then may be considered community property and some portion will go to the divorcing spouse. Another advantage my clients like is that we can direct where the assets in the beneficiary’s trust goes when the beneficiary dies. We can direct them to the beneficiary’s children or grandchildren. If your beneficiary has a healthy marriage and puts the inheritance in joint ownership with his or her spouse, what happens when your beneficiary passes away? If their spouse remarries, there is a real possibility that the assets may go to the new spouse and not to your beneficiary’s children. Providing that the inheritance is to be held in a trust for your child, and then passes on to your grandchildren, can help prevent this unfortunate scenario.

Putting protections in place for your children or other beneficiaries is an easy way to assure your hard earned money will benefit them the way you hope. 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.