Estate planning attorneys know that trusts are 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 despite the title of this article, “Trusts—What Is The Hype?” from mondaq. Instead, there’s a world of benefits provided.
A trust protects assets from creditors. If the person who created the trust, known as the “grantor,” is also the trust owner, it should be irrevocable. This means that the grantor does not easily change it. This type also can’t be modified or terminated once it’s been set up.
This is the direct opposite of a revocable living trust. With this type, the grantor has complete control, which has some downsides.
Once assets are transferred into an irrevocable trust, the grantor no longer owns the assets. 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 the reason for the trust to be created, it may void 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. The spendthrift trust will protect against creditors and loved ones from losing assets in a divorce. The spouse may be unable to claim a share of the trust property in a divorce settlement.
A few different types of trusts can be used to create a spendthrift version. However, the one thing they have in common is a “spendthrift clause.” This restricts the beneficiary’s ability to assign or transfer their interests and the creditors’ rights to reach the assets. However, the spendthrift clause will not avoid creditor claims unless any interest in the assets is relinquished completely.
Greater protection against creditor claims may come from giving trustees more discretion over 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 assets to satisfy support-related debts. Giving the trustee complete discretion over whether and when to make distributions will enable them to provide increased protection.
A trust requires balancing access to assets and preventing access from others. Your estate planning attorney will help determine which is best for your unique situation.
Reference: mondaq (Aug. 9, 2022) “Trusts—What Is The Hype?”