Our clients often express concern about protecting the inheritances of their children. Sometimes, parents worry about the security of a child’s job and what will happen if he or she loses that job, cannot pay bills, and subsequently loses the inheritance to creditors. Other times, parents worry about the influence a child’s spouse has over their child’s money management decisions. A child embroiled in a “bad marriage” frequently leads to parental concerns over an inheritance being diminished or lost through divorce. Finally, parents often wonder whether their children are mature enough to handle an inheritance on their own.
Fortunately, there are a number of ways for you to leave an inheritance to your children and protect that inheritance against threats such as these and more. Certain types of trusts, for example, have the power to accomplish this goal, with the added benefit of avoiding probate. Here are a few examples.
Discretionary trusts
With these types of trusts, the trustee has complete discretion to determine trust distributions and the beneficiary cannot demand distributions. The settlor of the trust can provide guidance about distributions and withhold distributions if a child is facing divorce, bankruptcy, and/or personal problems that may impact his or her ability to manage the inheritance wisely. In addition, creditors cannot access trust assets.
Support trusts
In the case of a support trust, the trustee is required to make distributions for health, education, support, or maintenance to the beneficiary if so desired by the beneficiary. Only certain creditors, known as “super creditors,” can access the trust assets. Examples include child support/alimony payments, claims for services that “protected, preserved or enhanced the beneficiary’s interest,” and state/federal government debts such as tax liens.
Spendthrift trusts
These trusts prevent the beneficiary from voluntarily or involuntarily transferring his or interest in the trust and protect trust assets from most creditors, excluding the super creditors described above.
If you are concerned about protecting your children’s inheritances against threats posed by creditors, predators, divorce, or even your children’s own poor decisions, we can design a plan capable of providing the level of protection ideal for your particular situation.
