Whether you are trying to protect your assets from possible creditors, prevent young heirs from spending their inheritance or minimize estate taxes, there is likely a trust for you. Here are several strategies that can help you achieve your estate planning goals.
Protecting assets from creditors
A trust can be a great way to protect your assets - but it is helpful if the trust becomes the owner of the assets and is irrevocable. That way, you as the grantor cannot modify or terminate the trust after it has been set up. This is the opposite of a revocable or living trust, which allows the grantor to modify the trust during their lifetime.
Once you transfer assets into an irrevocable trust, you have effectively removed all of your ownership of the assets and the trust. One benefit is that because the property is no longer yours it is generally unavailable to satisfy claims against you. However, placing assets in a trust will not allow you to sidestep responsibility for any debts or claims that are already outstanding at the time you fund the trust. There also may be a substantial "look-back" period that could negate the protection that would otherwise be provided.
Protecting assets for future generations
If you are concerned about what will happen to your assets after they pass to the next generation, you may want to consider establishing a "spendthrift" trust. Despite the name, a spendthrift trust does more than just protect your heirs from themselves. It can safeguard your family's assets against creditors as well. The trust also protects loved ones in the event of relationship changes. For example, if your child divorces, their spouse might not be able to claim a share of the trust property in the divorce settlement.
Several types of trusts can be designated a spendthrift trust - you just need to add a spendthrift clause to the trust document. This type of clause restricts a beneficiary's ability to assign or transfer his or her interests in the trust and it restricts the rights of creditors to reach the trust assets. But a spendthrift clause will not avoid claims from your own creditors unless you relinquish any interest in the trust assets.
You can usually gain greater protection against creditors' claims if you give your trustee more discretion over trust distributions. For example, if the trust requires the trustee to make distributions for a beneficiary's support, a court may rule that a creditor can reach the trust assets to satisfy support-related debts. For increased protection, give the trustee full discretion over whether and when to make distributions. You will need to balance the potentially competing objectives of having the access you want and preventing others from having access against your wishes.
Related Read: A Trust Can Be A Mighty Financial Fortress
There are many other types of trusts that can, for instance, facilitate charitable giving, provide lifetime income and enable you to pass wealth on to multiple generations. Just note that the laws regarding trusts can be complicated and may vary by state and personal situation. Talk to your ORBA estate planning advisor and tax accountant about your specific estate planning wants and needs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.