We often think of estate planning as a way to protect our assets while we're alive. However, one of the most powerful functions of a well-drafted living trust is its ability to protect your children's inheritance from their future risks, specifically lawsuits, divorce, and bankruptcy.

If you leave money to your heirs through a simple will, you're likely handing them unprotected cash. Here's how a trust changes that dynamic.

Does a Living Trust Protect Your Heirs from Their Creditors?

Yes, but only if it's structured correctly. A standard revocable living trust does not protect you from your own creditors while you're alive. However, once you pass away, that trust becomes irrevocable.

At that moment, if the trust contains specific spendthrift and discretionary provisions, the money you leave behind can be protected from your heirs' creditors in ways that direct inheritance cannot. This protection keeps your hard-earned assets working for your children rather than being seized by their creditors.

What Is a Spendthrift Clause and Why Do You Need One?

A spendthrift clause is a provision in a trust that prevents a beneficiary from selling, pledging, or assigning their interest in the trust to a third party. In simple terms, it stops your child from using their future inheritance as collateral for a loan.

If they default on a debt, the creditor cannot force the trustee to pay them directly, nor can they put a lien on the trust assets. The assets remain safe inside the trust structure until they are distributed according to the trust terms.

How Do Discretionary Distributions Protect Assets?

The strongest protection comes when you give your trustee discretionary authority. This means the trustee has the sole power to decide when and how much money to distribute to the heir.

Because the heir does not have an automatic legal right to demand a payout, their creditors cannot force one either. A creditor can only attack assets that the beneficiary effectively owns. If the money is still legally owned by the trust, the creditor cannot reach it.

For example, if your son is going through a difficult divorce, the trustee can choose to temporarily stop making distributions to him. Since the money stays in the trust, it is generally not considered marital property and remains safe from the divorce settlement.

Can Your Child Be Their Own Trustee?

This is risky for asset protection purposes. If your child is both the beneficiary and the trustee with full control, a judge may rule that the merger of title applies. This means they effectively own the assets, making them available to creditors despite the trust structure.

To maximize protection in Milford, consider appointing an independent trustee, such as a corporate trustee or a trusted family friend. Alternatively, you can require a co-trustee for distributions, ensuring no single person has complete control.

Building Protection Into Your Plan

A properly structured living trust does more than avoid probate. It creates lasting protection for the wealth you've worked hard to build, ensuring it benefits your children rather than their creditors, ex-spouses, or business partners.

We can help you incorporate spendthrift and discretionary provisions into your living trust to protect your heirs' inheritance. Contact us at 203-877-7511 to schedule a consultation and discuss asset protection strategies for your family. Mention this article when you call, and we'll walk you through the trust provisions that provide the strongest protection for your beneficiaries.

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