Asset Protection When Leaving Property To Your Children

If you are leaving property to a child, there may be a lot of concerns over the assets that are being left, especially if there are concerns about the child or the child’s lifestyle. But making sure that your child has the money and uses it responsibly, is not your only issue. Another concern should be protecting what you’re leaving to your child, from your creditors.

Although your descendants are not personally liable for your debts, creditors can make claims on your estate. That means that at least indirectly, your heirs will pay your debts, as your assets will be depleted to pay off your creditors before your beneficiaries get their inheritances. However, there are ways to minimize the risk of this happening

Who is the Trustee?

You may already know that leaving money in a trust can provide some level of asset protection from creditors. Of course, the extent of protection depends on the type of trust you create. But many people make one big mistake when they form a trust, a mistake that can seriously lower a trust’s asset protection qualities: They name their child as the trustee of his or her own trust.

This is called an interested trustee. Your child will probably like the idea of being a trustee over his or her own trust-after all, it provides your child with some measure of control over the assets put into the trust. But doing that can have consequences. The more control a trust beneficiary has over the assets, the less creditor protection the trust is likely to have, and making the beneficiary a trustee, puts the beneficiary completely in control of the assets.

You are much better off using an independent trustee, which is someone that has no relation to you, your beneficiaries, and who doesn’t stand to gain directly from the trust.

Protection From Divorce

Another benefit of a trustee that has no interest in the property inside the trust, is protection from divorce division. If your child gets divorced, your child’s (soon to be ex) spouse will have little ability to claim that the assets in the trust should be considered marital property, subject to division in the divorce.

You can provide an even higher level of asset protection if the trustee distributes assets to your child at the trustee’s discretion, as opposed to having measurable events determine when distributions of trust assets will occur.

Separate Trusts

If you are leaving property to children, it is best for children to have their own, separately titled trusts. This can also provide a level of divorce protection because those assets are segregated, and not commingled, with marital property.

An estate plan that directly transfers your assets into the children’s trust is best, as opposed to leaving your children the money, and them subsequently forming a trust to handle the assets. This also prevents commingling, and prevents the appearance that the children ever had control over the assets, both of which can put the assets in jeopardy of being taken by a creditor or an ex spouse.

Don’t let creditors deplete what you are leaving to your family. Call the Torrance will and estate attorneys at Samuel Ford Law today for help.

Sources:

assetprotectionplanners.com/asset-protection-trust/california/

svb.com/private-bank/insights/trust-estate-perspectives/examining-the-appeal-of-self-settled-trusts