Asset protection is an important consideration in estate planning. Often, we don’t realize that asset protection is needed until it is too late and assets are already at risk. Fortunately, by planning in advance, you can protect your assets from the creditors of your beneficiaries. Creditors can include those to whom loan obligations are owed, such as credit cards, or those less often thought of as creditors, such as lawsuit plaintiffs and ex-spouses. These creditors can generally gain access to any amounts distributed out to a beneficiary, and any amount the beneficiary is entitled to withdraw based upon the trust terms. A spendthrift trust can restrain these distributions to protect trust assets, protect the trust beneficiary from others, and protect the trust beneficiary from him or herself. Consider the following examples, and be sure to address your concerns with an estate planning attorney.
Inheriting a large sum of money (“large,” of course, being a relative term) can be the equivalent of winning the lottery to a beneficiary. The receipt of such funds, by nature, coincides with the death of a close loved one, which can make the gift feel truly like a gift in some cases, and in others like an attempt to compensate for the grief felt at the loss of their loved one. However, when the emotions are removed and the financial state of the beneficiary is viewed “in a bubble,” a beneficiary can suddenly have more funds than he or she is used to managing. A spendthrift trust can protect a beneficiary by limiting the amount to which they have access at any given time. Spendthrift beneficiaries might include a young beneficiary who doesn’t yet understand proper money management, an easily influenced beneficiary, or a beneficiary who isn’t necessarily young but has nevertheless been financially irresponsible.
Funds received by bequest, devise, or inheritance are generally considered separate property, so long as the funds are not commingled with marital funds. Nevertheless, if an inheritance is kept as separate property, it, along with other separate property, may still be subject to distribution in a Michigan divorce action if a court determines that it is just and equitable to do so. Keeping a trust beneficiary’s share subject to a spendthrift trust protects those assets from distribution in the event of divorce. This is important because nearly half of all marriages end in divorce today, and we don’t know what the future holds. For example, it would be impossible to tell if a grandchild who is very young at the time grantor grandparent passes away will one day be divorced.
Lawsuit plaintiffs are considered creditors. Any amount distributed to a lawsuit defendant, or available for such distribution by the trust terms, is reachable in a court judgment in favor of the lawsuit plaintiff. A lawsuit creditor could be someone claiming to have been injured by the trust beneficiary in an auto accident, or someone claiming to have been injured by the trust beneficiary based upon his or her profession – such as doctors or other medical professionals, attorneys, and other professions subject to malpractice suits. You may know the professions of all of your intended beneficiaries, or you may have young beneficiaries who have not yet chosen professions. Certainly, no one can predict whether a beneficiary may one day be involved in an event such as an auto accident. Prudent planning, therefore involves the use of spendthrift protections to protect your assets from any eventual creditors of beneficiaries.
To learn more about utilizing spendthrift trust features to protect your assets from your beneficiaries’ creditors, contact Mammel Law at 248-644-6326.