In a Nutshell: Asset Protection and Trusts

Asset protection for you

In a nutshell, here’s what you need to know about trusts as they relate to asset protection: the less access you have to assets in a trust, the less likely your creditors will have access to those same assets to satisfy any claims they may have against you. Of course, the corollary to that rule is: the more access you have, the more easily your creditors will be able to invade your trust.DSC02452

So, for example, if you’re the grantor/creator of a revocable living trust AND the trustee AND a beneficiary of that trust, any creditors you may have won’t be standing very far behind you in the asset/income disbursement line. They may even be standing in front of you. Heck, they may have already taken up residence in your trust.

On the other hand, if you’re only the beneficiary of a irrevocable trust set up by someone else AND if the trust document says that the trustee (also not you) has total discretion as to whether she will disburse funds to you, then your creditors would be well advised to look elsewhere for relief.

Those are two poles with a broad spectrum of options in between, a sliding scale of creditor protection, if you will. I will discuss some of the points on that spectrum in later posts (see the tags below for a kind of road map). But to repeat: the less access you have, the less access your creditors have.

Asset protection for your children

Now, stop thinking about yourself, and think instead about your children. The same rules apply to them. The less control they have over any inheritance they receive from you, the better protected that inheritance will be from their creditors.

So here’s an idea: Instead of giving them a lot of money outright when you die, or even instead of distributing money and other assets from your trust to them in stages–1/3 at age 25, 1/3 at 30, and 1/3 at 35, for example–consider giving your successor trustee discretion as to when, why, and how much he might distribute from your trust into the anxiously waiting hands of your children.

Why? Because if one of those children has creditors knocking on his door when you’re alive, you can bet those same creditors will be knocking on that child’s door even more vigorously the moment your obituary goes viral. But, if you’ve set your trust up correctly, those creditors will have to rely on the child rather than the trust for payment.

That’s as it should be, by the way. Your child’s creditors are his creditors after all–not yours.

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