By Libby Banks,
The Law Office of Libby Banks, PLLC
Recently a client asked whether his Revocable Living Trust (RLT) would protect his assets from his creditors. The answer is no. While the RLT is a great estate planning and probate avoidance tool, it is not an asset protection trust.
I told him that while his RLT didn’t protect him from his debts, we could structure the inheritance for his children to protect them – and not just from potential creditors. We do this by directing in the RLT that each beneficiary receives their share in their own irrevocable trust.
Trusts Can Keep an Inheritance Out of the Hands of Creditors
The beneficiaries’ trusts do give them asset protection. An outright gift of the inheritance can result in a beneficiary’s creditors snatching all your hard-earned money. For instance, in 2008, Son started a business, but in the economic downturn, the business failed. He filed bankruptcy. A month after filing, Mom died, leaving him everything in an outright distribution. It was all his. Except it wasn’t his. Because he had filed bankruptcy, it all went to his bankruptcy trustee.
Giving the inheritance in trust could have protected the inheritance from the bankruptcy creditors and 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, and while he has been clean and sober for a while, he still had concerns.
I told him the irrevocable trust can provide protection for beneficiaries who might not manage the inheritance well, whether due to addiction issues or just being bad with money. Leaving the money in trust doesn’t mean you don’t provide for them. The trust provides that the trustee can make discretionary distributions to the beneficiary for their health, education, maintenance, and support.
Giving the inheritance in an irrevocable trust allows your beneficiary to benefit from the assets but doesn’t give that person unlimited access to spend how 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 rocky, and he was concerned about what would happen if she decided to divorce after getting her inheritance.
I explained that if his daughter received her inheritance in trust, it could prevent her from losing 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 daughter and not her husband.
My client was very happy to be putting protections for his children in place to assure his hard-earned money would benefit them the way he hoped.
If you are interested in estate planning, visit libbybanks.com or call 602-375-6752 for your free initial consultation.