Asset Protection for Your Heirs

The revocable living trust is a great estate planning tool, but it does not protect your assets from your creditors. The assets in your trust are still considered your assets because you continue to have complete control over them. On the other hand, you can use your trust to provide asset protection for your beneficiaries after your death.

When you pass your assets on to your beneficiaries, instead of giving them of all the assets outright, where they put it in their own bank account or in their own name, at death, your trust directs the trustee to create an irrevocable trust for each beneficiary.

Trusts Can Keep an Inheritance Out of the Hands of Creditors

These irrevocable 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 it didn’t make it. 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 could 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

When we create trusts for your beneficiaries at your death, we provide protection from beneficiaries who might not manage the inheritance well, such as a child (or the child’s spouse) who is a spendthrift, or an heir with drug, gambling or other addiction issues. Leaving the money in trust doesn’t mean you don’t provide for them. The trust will allow for discretionary distributions to your heirs for the health, education, maintenance and general welfare of the beneficiary.

Using the trust allows your beneficiary to benefit from your assets but doesn’t give that person unlimited access to spend on whatever he pleases.

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

If a beneficiary is divorcing, or has a rocky marriage, leaving the inheritance in trust can assure that your beneficiary keeps your money 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.

The Trust can protect the inheritance at the death of your heir also. Your child’s spouse may be entitled to half or more of the child’s separate property at death, even if they wouldn’t be entitled to any of it in a divorce. Thus, if your child dies with the assets in his own name, his spouse may take the assets instead of your grandchildren. On the other hand, if you give the assets in a trust, you state who is to receive the remainder of the assets after your child dies. You can even include the spouse if you wish, while assuring that what is left at his or her death goes to your grandchildren, and not someone else.

The Arizona Advantage for the Responsible Heir

In Arizona, we have the somewhat unique law that permits a beneficiary to be trustee of his or her own trust and still have some of the protections we’ve discussed in this article. That means the beneficiary has control over the trust and all the assets in it, while still getting the advantages of divorce protection and some of the creditor protections. That’s an advantage you should take advantage of!

Asset protection planning for your heirs is a substantial benefit to using a revocable living trust as your primary estate planning tool. If you don’t have a revocable living trust, we are glad to assist you. Visit my website at www.libbybanks.com or call 602-375-6752 for your free initial consultation via Zoom, Facetime or phone.