Imagine the following scenario: you work hard to accumulate wealth during your lifetime and create a comprehensive estate plan to care for your family. But then, after you pass away, the assets you leave to one of your children are all used to satisfy the claims of your heir’s creditors.
This unfortunate situation can happen if one of your heirs has debt, gambling issues, or is financially irresponsible. Once they receive your property, it’s theirs. That means it’s subject to their creditor’s claims.
One estate planning strategy to consider in these situations is a spendthrift trust.
Instead of leaving assets to your heir outright, you can leave the assets to a spendthrift trust. Your heir’s creditors won’t be able to reach the assets inside of the trust.
The trustee of a spendthrift trust will typically make regular payments to the beneficiary (your heir). But if the heir gets into debt or financial trouble, the trustee may be able to withhold payments.
One important note—certain creditors, such as the IRS, may have special powers to place a lien on assets inside the trust.
This strategy ensures that your assets actually benefit your beneficiary, rather than going straight into their creditor’s pockets. It can also force them to be more financially responsible because they won’t get access to a large lump-sum of money.
Spendthrift Trust With Beneficiary Control
You may also choose to give your beneficiary some control over the trust assets by naming them the trustee. This could be risky if they lack financial responsibility because they could access all of the assets and potentially waste them.
However, when properly drafted, these trusts can still protect the assets from the heir’s creditors. This strategy can be used when you are not concerned about your heir’s reckless spending, but you still want to protect the assets from their creditors.
You can also restrict your heir’s access to assets until they reach a certain age or graduate college. By waiting until they are older to give them full control of the property, they may be more mature and able to handle the responsibility.
If you want to provide your heirs with asset protection or control how they use inherited funds, ask your estate planning attorney about creating a trust that meets your objectives.
King Law handles estate planning matters in North and South Carolina, including wills, trusts, and powers of attorney. Follow us on Facebook for more information and updates on legal issues.