Keeping Inheritances Out Of Creditors’ Hands
Let’s say that you want to leave money or assets to someone in a trust. There’s one problem: The person you are leaving the assets to, has or may have, a lot of creditors. The last thing you want is for money that you leave to this person, to be taken by his or her creditors.
Is there a way to structure your estate plan in a way that allows you to leave money or property to your chosen beneficiary, while also preventing your beneficiary’s creditors from getting that money?
It turns out that there are a number of strategies that you can use which can help avoid creditors from accessing the fund that you leave for someone in a trust.
Creating a Trust for Yourself
The first thing to understand is that if you leave any assets or property to yourself in a trust, there is no asset protection—your creditors can almost always access funds that you leave for yourself in a trust.
When it comes to other people, the creditor protection vehicles are a bit easier.
Any kind of spendthrift trust will provide a certain measure of asset protection. A spendthrift trust is one where the beneficiary cannot access the funds, spend the funds, or do anything with the funds, without the trustee’s prior approval.
One thing that you can do is establish a trust where the trustee does not make direct monetary distributions to the beneficiary. If the beneficiary receives no money or funds, the creditors cannot go after those funds.
Instead, have a trustee buy the things that the beneficiary needs. For example, the trust can have the trustee pay the beneficiary’s rent or mortgage, or have the trustee purchase the beneficiary’s car, or put money into a college fund. Anything that avoids a direct cash distribution to a beneficiary will be difficult for creditors to obtain access to.
The more that what you leave goes to someone’s support—which can include education, living expenses, or medical needs—the less likely it is that a creditor can access those funds.
Discretion is Good
Additionally, allowing the trustee some discretion in distribution can help avoid creditors. If distributions must be made regularly on a pre-set schedule, creditors can often attach and reach those funds.
But when the trustee has discretion to distribute what the trustee wants and when the trustee wants, creditors have a hard time accessing funds. Creditors cannot force a trustee to make distributions in a trust.
The trustee can do a number of things, which can avert creditor claims on distributions:
-Wait to disburse money or assets until creditor claims are past the legal time to establish a claim on the funds
-Make distributions that are small enough that creditors won’t bother to go after the funds
-As stated above, pay for the beneficiary’s items or pay his or her bills, instead of distributing cash or bank account transfers to the beneficiary.
Questions about protecting the funds you are leaving to someone as an inheritance? Call the Torrance will and estate attorneys at Samuel Ford Law today.