Trusts for Asset Protection, Not Just Probate Avoidance

The common belief, for those interested in the topic, is that the sole reason to use a revocable living trust is to make sure that your family can avoid probate and streamline the succession of your assets after you pass. While that can be a substantial benefit to utilizing trust-based planning, asset protection may be an even more important aspect of using a trust to protect your family.

Benefit Your Kids When They’re Ready

Without a structured plan in place, your minor children can receive an inheritance from your estate as soon as they turn age 18, pursuant to the Uniform Transfers to Minors Act (the federal law prohibited minors from receiving gifts or inheritance). With that in mind, imagine how much money your kids stand to inherit if something were to happen to you tomorrow. How would they use that money? How would you’ve used that money at that 18? I think at least 9/10 of you would respond in a less-than-wise way.
Large sums of money can ruin someone’s life – inhibiting personal growth, exposing or promoting an underlying drug habit, self-isolation, etc. It’s the “found money” problem you often see with lottery winners. They didn’t earn the money, so they have no reservations against spending it on whatever they “need” and whenever they “need” it. I would venture to say that most 18-year-olds in this generation cannot handle large sums of money responsibly. So, it’s up to you to structure your plan in a way that will benefit your minor kids when they are ready. Most often, parents will structure a trust to distribute shares of the minor’s inheritance in several increments, usually beginning in the mid-to-late 20’s and continuing into the 30’s. By pushing back the qualifying age for your kids to receive a benefit, you increase the chance that they’re going to be mature and ready for it, and thus use the funds in a mature and responsible way.

Protection From Future Creditors and Predators

After you’re gone, most often your trust will become irrevocable (although some trusts will be structured to become irrevocable after the surviving spouse dies, if it’s a joint trust of a married couple). That’s an important legal distinction because irrevocable trusts cannot be manipulated and the beneficiaries of an irrevocable trust cannot force the trustee to make a distribution to them unless the trust itself requires it.
If your child gets into trouble in the future, whether it’s an unpaid debt or a personal injury, the assets held in trust for their benefit will be protected from the reach of a potential creditor. Likewise, someone who may be in a position to exact influence over the child, like a future spouse or a “friend” with unethical motivations, would be prevented from doing so if the assets are still held in trust. However, as soon as the assets are distributed, the creditor and predator protection ends. But, better to lose that protection when the child is, say, 35, than when they are 18.

Assess Your Options

There’s no one-size-fits all planning tool. If your kids are old enough, and mature enough, to receive your assets outright, then the creditor protection utility of a trust is less useful. Your entire family and financial situation should be evaluated before moving forward with estate planning.