Before you plan to distribute large sums of money to your beneficiaries, find out and consider their financial and personal circumstances.
Beneficiaries such as children and grandchildren are susceptible to potential claims from creditors or divorcing spouses. Preparing the proper Trust can help to avoid these threats.
If your goal is to have your assets pass to your children or grandchildren and not to their spouses, consider whether or not the intended beneficiaries are having marital problems that could lead to divorce. Even if the marriages are solid, you may still want to ensure that only your descendants receive the inheritance.
In general, assets bequeathed to children (in many states) are protected in divorce under equitable distribution laws. On the other hand, if the beneficiary and spouse placed all of their assets together in a joint account, the protection is lost.
To completely prevent your child’s spouse from gaining access to a gift or inheritance, the parent can prepare a protective lifetime Trust rather than have the assets distributed outright. The Trust would be assigned to the care of a Trustee that you have carefully selected. The Trustee would distribute the assets over the lifetime of the child according to structured provisions created by the parent.
The Trust assets are protected from the child’s spouse as well as any potential creditors provided the correct instructions are written.
Once a creditor learns that you have made a large deposit in your bank account, it will have the right to attach assets. In some instances, the creditor can obtain a court order to force the trustee to pay from the trust until the beneficiary’s debt is paid.
Remember, the purpose of preparing the lifetime Trust is to ensure that your beneficiary is taken care of and to prevent other potential claims from gaining access to it. While your child might feel a little frustrated in not having control over the distributions, a carefully constructed Trust will remain only for the benefit of the child.
The language of the Trust must specifically limit the child’s control over the trust and not permit mandatory distributions of any amounts to the child or permit the child to make transfers of interest. Failure to express these limitations could result in the creditor getting a court order that places it in the beneficiary’s shoes and thus capable of receiving future distributions until the debt is paid.
A discretionary Trust only permits the Trustee to make limited distributions to the beneficiary and the beneficiary cannot demand any additional payments, therefore, the creditors cannot demand payments from the Trust either.
A “spendthrift clause” will prevent the child from voluntarily or involuntarily transferring interests in the Trust. This also prevents the creditor from getting a court order to force a transfer of the beneficiary’s interests.
Consult an attorney in your state to learn whether or not there are any exceptions that will override even the strictest Trust provisions. Some states will permit access to the Trust assets for debts like unpaid child support, alimony, and state or federal taxes.
Information contained in this article is not intended to be legal advice nor applicable to all situations. For legal assistance, contact an attorney in your state of residence. You can visit Arleen’s website at arleenrichards-law.info.
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