It is common in estate planning to leave money to adult children. This is typically accomplish by providing for the children in a will. Often a Testator, the person making the will, is unaware that the money left to beneficiaries outright could be taken by a beneficiary’s creditors. When a distribution is made outright, it becomes an available asset to the beneficiary and can be subject to creditors.
Even when advised of the risk of creditors, many Testators are unconcerned of the risk of creditors taking a portion of inheritance. Testators often say statements such as “My children are responsible” or “My daughter and son know how to manage money.” While these statements may be true, there is always a risk of involuntary creditors. When thinking of creditors, most people think of voluntary creditors, in which a person agrees to become indebted in exchange for some benefit. Examples of voluntary credits are credit cards, automobile loans, and mortgages. By contrast, involuntary creditors are those in which there is no expressed agreement creating the debt. Involuntary creditors are often created by the liability from a lawsuit. For example, an involuntary creditor can be created by liability from an auto accident or a claim against a business owned by a beneficiary. Even the most responsible beneficiary can be subject to involuntary creditors.
Unlike distributions made outright from a will, funding a trust for beneficiaries can provide protection against creditors of the beneficiary. The amount of creditor protection of a trust depends on the specific provisions of the trust. There is also a need to balance the desire for creditor protection from the trust with the need for a beneficiary to be able to enjoy the assets of the trust, while no trust can provide complete protection from creditors and there are some creditors, such as those collecting child support, that can collect against a beneficiary’s trust interest, the right trust provisions can provide significant protection.
As there is a delicate balance between access to funds and protecting trust assets, it is advisable that an experienced estate planning attorney draft such a trust according to the unique circumstances of the Testator and their family. The incremental cost of adding this protection is a wise investment in protecting loved ones.