Protecting Your Beneficiaries’ Inheritance

Protecting Your Beneficiaries’ Inheritance

You can protect the assets that you pass on to your spouse, children or other beneficiaries from current or future creditors by establishing a testamentary trust to receive a beneficiary's inheritance. After all, why give your estate to a beneficiary if his current or future creditors can take it away? However, the degree of creditor protection depends on how much control that you or your beneficiaries are willing to give up to achieve creditor protection. Giving up total control to a 3^rd party trustee will yield the best creditor protection.

Are all creditors covered?

Under current law, a properly drafted trust prevents current or future creditors from attaching trust assets for all but the most egregious acts committed by your beneficiaries. For example, a judge will most likely find some creative way to circumvent creditor protection provisions in order to make sure that a beneficiary satisfies his or her obligation for child support.

How does it work?

The law does not allow you to escape your debts and financial obligations, including any judgments levied against you. However, the law does allow you to place restrictions on assets that you give to others. For example, you have every right to create a trust that prevents trust assets from being used for anything other than your beneficiary's health, support or education. If some time in the future a judgment is entered against your spouse, children or other beneficiaries, the creditor is prevented from seizing trust assets since the trust assets can only be distributed, for example, for the health care, support or education of your beneficiary. In order to achieve creditor protection recent court decisions require at least one disinterested party to be co-trustee. Your beneficiary cannot have total control of his or her trust.

What if my beneficiaries do not have creditors?

That's good, but unless you have a crystal ball that can predict the future, your beneficiaries may be vulnerable to creditors in the future.

For example, let’s say your spouse, child or other beneficiary is involved in a serious automobile accident and injures a young child who is permanently paralyzed and requires around-the-clock nursing care for the rest of her life. It is later determined that your beneficiary was at fault and that a $3 million judgment is appropriate given the child’s age and injuries. Unfortunately, your beneficiary's automobile insurance is completely inadequate to meet the judgment imposed. In order to satisfy the judgment, plaintiff's attorney will most likely attach every asset that your beneficiary owns, including the estate your beneficiary inherited outright by means of a simple will. If instead your beneficiary inherited your estate through a living or testamentary trust, your estate should be protected from most judgment creditors. Your beneficiary can even be the trustee of his or her own trust as long as your beneficiary does not have full control over the trust estate.

Can my beneficiary purchase a house with his or her inheritance?

Your beneficiary can purchase a house or any other asset as trustee of his or her trust and thus, protect the house from most judgment creditors.