Fall is often associated with back-to-school time, when many clients focus on their children’s educational future. This makes fall the perfect time for estate planning attorneys to remind their clients how important it is to take steps to secure their children’s financial future as well. By incorporating asset protection in their estate plan, clients can not only provide an inheritance for their children but also protect the inheritance from creditors, a soon-to-be ex-spouse, and poor money management that can quickly deplete hard-earned assets.
Asset Protection for Adult Children
A spendthrift trust, or a trust containing a spendthrift provision, is often designed for the benefit of individuals who may mismanage their money, easily fall into debt, be easily defrauded or deceived, or have an addiction that may result in squandering of funds. However, even if an adult child is an excellent money manager, a spendthrift provision can protect their inheritance against lawsuits or a divorcing spouse.
Spendthrift provisions prohibit a beneficiary from voluntarily or involuntarily assigning their interest in the trust. These restrictions prevent the beneficiary from squandering their entire interest or having it garnished by the beneficiary’s creditors.
In addition to language indicating that no voluntary or involuntary assignments are permitted, it is prudent for the trust instrument to provide an independent trustee with complete control and authority to make decisions about how the funds in the trust are spent and what payments to or for the benefit of the beneficiary can be made. In addition to providing the trustee with complete discretion to determine when and if distributions should be made, the trustee can be authorized to make payments on a beneficiary’s behalf, for example, to purchase a new house or car, instead of distributing the funds directly to the beneficiary, which would make the funds vulnerable to creditors’ claims.
Protecting Assets for the Benefit of Minor Children
Unlike adult children, minor children are not legally responsible for debts or liabilities. In addition to providing for their children’s everyday needs and wants, parents are responsible for liabilities stemming from lawsuits brought about by minor children’s actions, as well as claims arising from the child’s medical bills. One of the best ways for clients to protect their minor children’s inheritance is to protect their assets from claims or lawsuits brought by the client’s own creditors—regardless of whether those claims are related to their children.
Clients can use a variety of methods to protect their assets to provide a secure financial future for their children. One such method is the creation of a domestic asset protection trust (DAPT), an irrevocable trust that allows the settlor of the trust to be a discretionary beneficiary while protecting the trust assets from the settlor’s and beneficiaries’ creditors. The laws in jurisdictions that allow DAPTs do not protect against existing creditors’ claims immediately upon the creation of the DAPT. The laws establish a statute of limitations determining a period between the date of transfer of assets to the DAPT and the date when the transferred asset will be protected from the settlor’s creditors. Many of the states permitting DAPTs provide exceptions for certain classes of creditors. Nevertheless, once the limitations period has run, a DAPT is an excellent tool for clients wishing to protect their minor children’s future inheritance from existing and future claims or liabilities.
Learn more about asset protection and how to draft third-party domestic asset protection trust using the estate planning software, Wealth Docx® here.