How can I protect my beneficiaries and their inheritance from lawsuits, creditors, bankruptcy and divorce?
Quick Answer
Leave the inheritance in a trust rather than outright. Money your child owns is reachable by their creditors, exposed in their divorce, and available in their bankruptcy. Money held in a properly drafted trust for their benefit generally is not, because they do not control it.
The distinction that does all the work
Give your daughter $200,000 and it is hers. Her creditors can reach it. It may be pulled into a divorce. A bankruptcy trustee is looking at it.
Leave the same $200,000 in a trust for her benefit, with a trustee deciding distributions under standards you set, and that changes.
The protection comes from the fact she does not control it. That is the whole mechanism.
The spendthrift provision
This is the clause that makes it work, and it does two things.
It prevents a beneficiary from assigning or pledging their interest, so they cannot borrow against it or promise it away. And it prevents most creditors from reaching the interest before it is actually distributed.
Almost every well-drafted trust for a beneficiary contains one. If you are reviewing an old document and it does not, that is worth asking about.
Protecting a beneficiary from themselves
Sometimes the risk is not an outside creditor.
Consider a son with genuine demons around narcotics. He has been through rehab and has not yet hit rock bottom. If he has access to money, he is buying narcotics with it. Every parent in that position knows it.
Right now you control the wallet. You can require clean drug tests before you hand over anything. A testamentary trust simply continues that same control after you are gone, with a trustee applying conditions you set rather than the money arriving in one lump on the day of your funeral.
That is not punishment. It is the only version of that inheritance that helps him.
Protecting a beneficiary who cannot manage money
Consider a daughter with champagne taste on a Kool-Aid budget. She maxes out credit cards, cannot make the minimums, and creditors have taken her to court and obtained judgments. Those judgment creditors can pursue involuntary collection and bank garnishments.
Leave her $2 million outright and it lands in an account those creditors can garnish. Far better to lose $2,000 to a single garnishment than $2 million to all of them.
A trust shields the inheritance and lets a trustee provide for her over time.
The beneficiary on benefits
This one is urgent rather than optional.
If a beneficiary receives Medicaid or SSI, an outright inheritance can end those benefits. The money gets spent down, the benefits eventually resume, and years of savings have been converted into a gap in care.
A properly drafted special needs trust holds assets for their benefit without those assets counting as theirs. This has to be set up correctly and in advance.
Practical steps
Consider leaving inheritances in trust rather than outright, particularly for anyone young, in a risky profession, or with any of the above in the picture.
Include a spendthrift provision. Choose a trustee who will actually say no. Consider staging distributions by age rather than one lump sum.
And check your beneficiary designations, because a retirement account naming a child directly bypasses every bit of this.
Your next step
Schedule a complimentary 15-minute Strategy Session at 404-549-5001.
More is on our Estate Planning page and our Asset Protection Planning page.
Related questions
- What is a Spendthrift Provision in a Trust?
- What is a Special Needs Trust and how can I benefit from it?
- Whom should I choose as trustee of my Trust?
- What are Beneficiary Designations?
This page is presented for educational purposes only and nothing on it should be treated as legal advice. What applies to you is very fact specific to your situation and your family. Our attorneys are licensed in Georgia and Michigan. This area of law has frequent statutory and policy changes.
Looking to find an experienced estate lawyer in the Georgia area who is skilled in asset protection and estate plan preparation? Shannon Pawley is an attorney in Georgia with expertise in estate planning and asset protection. Shannon can provide assistance with creating an estate plan to include making a will and how to establish a trust properly. If you have questions about asset protection or questions about making an estate plan, reach out to Shannon and she will be glad to help answer all the estate planning questions you might have!
