Asset Protection for Beneficiaries and Heirs

Often, people think about asset protection simply as a way to minimize risk during their lifetimes, separating risk management from estate planning. However, asset protection for beneficiaries can play a significant role in estate planning—especially when there are concerns about one or more heirs or beneficiaries based on issues such as:

• Drug or alcohol problems
• Large debts or unpaid judgments
• Irresponsible or risky lifestyles

While asset protection strategies are most important when the person creating an estate plan has reason to fear that the assets he or she passes to a particular beneficiary will be at risk, protective measures can benefit everyone. Even the most responsible of heirs faces the same type of risks that encourage careful financial managers to employ asset protection strategies during their lifetimes.

Living Trusts as Asset Protection for Beneficiaries

A living trust can provide asset protection for beneficiaries, but does not provide such protection to the grantor. The person who establishes a living trust typically serves as grantor, trustee, and beneficiary during his or her lifetime, and can alter the trust at any time. Since the grantor retains full control over the assets in the trust, those assets are typically within reach of creditors, from debt buyers holding unpaid credit card debt to the victim of a car accident in which the grantor was at fault.

However, the terms of the trust may be structured in way that protects beneficiaries from this type of exposure. A creditor’s rights to a beneficiary’s interest in trust assets is typically limited by the terms of the trust. Thus, limiting the purposes for which funds may be disbursed under the trust, limiting the amount that can be disbursed in a certain time period, or directing that the trustee make payments directly on behalf of the beneficiary rather than disbursing funds to the beneficiary can limit exposure.

For example, a grantor could place the long-time family home in a trust and direct the trustee to allow his adult son to live in the house for life, and to use trust assets to maintain the property and pay property taxes. Because the grantor’s son would not own the property and would not have the right to transfer it, the asset would be shielded from his creditors.

Similarly, the trust terms could specify that trust funds could be used only to pay certain types of expenses. Some of the most common examples include necessary medical expenses and educational expenses.

Trust Disbursements are Vulnerable to Creditors

It is important to note that disbursements to beneficiaries become accessible to creditors as soon as they become the property of the beneficiary. Thus, a trust document that specifies that $5,000/month be disbursed to the beneficiary puts that money at risk, though creditors would only be able to access the funds as they came due and were paid out to the beneficiary.

No Protection for Direct Inheritance

In contrast to a carefully constructed trust, either a will or the process of intestate succession can leave a beneficiary at risk. That’s because when assets pass through an estate to a beneficiary, the testator or intestate deceased party loses the ability to place restrictions or conditions on the assets. If the same house described in the example above were to be left to the son in the testator’s will, or if the father died without a will and his son inherited the house through intestate succession, the house would become the son’s asset. At that point, it would become accessible to creditors, and the house could be lost not only to the son, but to future generations.

Employ Asset Protection for Beneficiaries and Yourself

Asset protection and estate planning go hand in hand. An estate planning attorney who is also experienced in asset protection strategies can be your best resource as you plan to protect yourself, your assets, your direct beneficiaries, and future generations.

You owe it to yourself and your loved ones to educate yourself about how you can use trusts, LLCs and other business entities, and other strategies to ensure that your wealth remains secure in your lifetime and beyond.