Legal

Asset Protection for Your Heirs

By Libby Banks, The Law Office of Libby Banks, PLLC

The revocable living trust is a great estate-planning tool, but it does not protect your assets from your creditors. The assets in your trust are still considered your assets because you continue to have complete control over them. On the other hand, you can use your trust to provide asset protection for your beneficiaries after your death.

Instead of giving your heirs the inheritance outright, to put it in their own name, at death, your trust directs those assets into an irrevocable trust for each beneficiary.

TRUSTS CAN KEEP AN INHERITANCE OUT OF THE HANDS OF CREDITORS

These trusts do provide asset protection for the trust assets. Where an outright gift of the inheritance can result in a beneficiary’s creditors snatching all your hard-earned money, leaving the money in trust provides asset protection for the trust assets. A real-life example was a son who had filed bankruptcy. Shortly after filing, his mom died, leaving him everything in an outright distribution. It was all his. Except it wasn’t his. Instead, because he had filed bankruptcy, it all went to his bankruptcy trustee.

Had mom given him the assets in trust, he could have completed the bankruptcy and had the assets in the trust to give him a fresh start after bankruptcy.

TRUSTS CAN PROTECT AN IRRESPONSIBLE HEIR FROM HIMSELF AND STILL PROVIDE FOR HIS WELFARE

When we create trusts for your beneficiaries at your death, we provide protection from beneficiaries who might not manage the inheritance well, such as a child (or the child’s spouse) who is a spendthrift, or an heir with drug, gambling or other addiction issues. The trust allows for discretionary distributions to the heirs, but prevents them from having unlimited access to spend however he pleases.

TRUSTS CAN PROTECT THE INHERITANCE IN CASE OF YOUR BENEFICIARY’S DIVORCE OR DEATH

If a beneficiary is divorcing, or has a rocky marriage, leaving the inheritance in trust can assure that your beneficiary keeps your money and doesn’t lose part of it in a divorce. The assets held in trust won’t be divided up, because the inherited trust is separate property, belonging only to the beneficiary and not her spouse. An outright distribution of the inheritance, however, is likely to be commingled in accounts held by both the beneficiary and his spouse. The assets then may be considered community property and some portion will go to the divorcing spouse.

THE ARIZONA ADVANTAGE FOR THE RESPONSIBLE HEIR

In Arizona, the law permits a beneficiary to be trustee of his or her own trust and still have some of the protections we’ve discussed. The beneficiary has control over the trust assets, and divorce and creditor protections. That’s an advantage you should take advantage of.

If you don’t have a revocable living trust, or need an update, give us a call at 602-375-6752 for your free initial consultation via Zoom, FaceTime or phone.

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