Estate planning attorneys know the Swiss Army knife of estate planning. Whatever the challenge is to be overcome, there is a trust to solve the problem. This includes everything from protecting assets from creditors to ensuring the right people inherit assets. There’s no hype about it, despite the title of this article, “Trusts—What Is The Hype?” from mondaq. Rather, there’s a world of benefits provided by trusts.
A trust protects assets from creditors. If the person who had it created, known as the “grantor,” is also the owner, it is best for the trust to be irrevocable. This means that it is not easily changed by the grantor. The trust also can’t be modified or terminated once it’s been set up.
This is the direct opposite of a revocable or living trust. When it's revocable the grantor has complete control of the trust, which comes with some downsides.
Once assets are transferred into an irrevocable trust, the grantor no longer has any ownership of the assets or the trust. Because the grantor is no longer in control of the asset, it’s generally not available to satisfy any claims by creditors.
However, this does not mean the grantor is free of any debts or claims in place before the trust was funded. Depending upon your state, there may be a significant look-back period. If this is the case, and if this is the reason for the trust to be created, it may be voided and negate the protection otherwise provided.
Most people use trusts to protect assets for future generations, for a variety of reasons.
The “spendthrift” trust is created to protect heirs who may not be good at managing money or judging the character of the people they associate with. It will protect against creditors, as well as protecting loved ones from losing assets in a divorce. The spouse may not be able to make a claim for a share of the protected property in a divorce settlement.
There are a few different trusts that can be used to create a spendthrift trust. However, the one thing they have in common is a “spendthrift clause.” This restricts the beneficiary’s ability to assign or transfer their interests in the trust and restricts the rights of creditors to reach the protected assets. However, the spendthrift clause will not avoid creditor claims, unless any interest in the protected assets is relinquished completely.
Greater protection against creditor claims may come from giving trustees more discretion over the distribution. For instance, a trust may require a trustee to make distributions for a beneficiary’s support. Once those distributions are made, they are vulnerable to creditor claims. The court may also allow a creditor to reach the trust assets to satisfy support-related debts. Giving the trustee full and complete discretion over whether and when to make distributions will allow them to provide increased protection.
A trust requires the balance of having access to assets and preventing access from others. Your estate planning attorney will help determine which is best for your unique situation.
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Reference: mondaq (Aug. 9, 2022) “Trusts—What Is The Hype?”
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