Inheritance Trust to Protect an Inheritance from Creditors

Many of my clients are deeply concerned about how litigious our society has become and fear that their assets may one day be taken by creditors.  As a result, they desire to legally protect their assets from creditors, including the possibility of divorce.  If you share these concerns, I want you to be aware of an important technique that can asset protect an inheritance and provide an important piece of your estate plan.

The traditional estate planning process focuses exclusively on passing assets downstream to beneficiaries (i.e., to children and grandchildren), often ignoring a potential inheritance from parents or other family members.  However, Americans are living longer and longer and trillions of dollars will change hands in the coming decades.  Most of these assets will be transferred in a manner that is not protected from the claims of creditors or former spouses.

The laws of most states, including North Carolina, prohibit so-called "self-settled trusts" - an irrevocable trust you establish for your benefit, yet which purports to protect the trust assets from creditors.  Therefore, once you receive an inheritance, it is too late to asset protect it.  For potential inheritances, we can, by creating an Inheritance Trust to be the recipient of the inheritance, protect these assets.  An Inheritance Trust legally protects the inherited assets yet allows you to access them as necessary.  It also may remove a substantial portion of the assets from your potential taxable estate, thereby saving estate taxes at your death.

If you want to know more, please contact me.

Patrick

How does divorce affect your trust?

By: Patrick D. Newton:  If you set up a revocable trust for your self that has provisions in it for your spouse, including naming the spouse as a current or successor trustee, those provisions are revoked upon divorce.  This default rule could be changed in the trust document itself, but generally would not be.

As for an irrevocable trust, the Grantor's divorce from a spouse who is a beneficiary, or a trustee, does not impact the irrevocable trust at all.  This general rule could also be drafted around.  Typically, if you are creating an irrevocable trust for your spouse, you will want to include language that will deem the spouse as deceased upon divorce. 

If you are creating an irrevocable trust to qualify for the unlimited marital deduction, you cannot have such a provision and also qualify for the marital deduction.  You could, however, terminate the spouse's role as a trustee, and you could arguably terminate any access to principal.  The income in a marital deduction trust must continue to be paid to the spouse for his or her lifetime.