Why do parents spend their lifetime scrimping, saving, and sheltering their
wealth, only to leave their fortune to their kids who spend or lose it
with their own lawsuits, bankruptcy, divorces, and so on?
If you gift significant wealth outright to your children, or other beneficiaries,
it's foolish to leave their inheritance unprotected from their legal
and financial problems. You might not want, or need, a trust to protect
your assets from your creditors, but consider a trust to protect whatever
assets you bequeath to your beneficiaries. This is particularly important
when your children or grandchildren are your beneficiaries.
Irrevocable trusts can be
intervivos or testamentary. You transfer your assets to an intervivos trust within
your lifetime. You transfer assets to a testamentary trust upon your death.
With a testamentary trust, your assets stay vulnerable to your own creditors
until you die because only then do your assets pass to the trust.
A revocable trust can protect the trust assets from your beneficiaries'
creditors; but not your own. Whether you transfer your assets to the trust
within your lifetime (an intervivos trust) or upon your death (a testamentary
trust), the one major difference between a revocable and an irrevocable
trust funded within your lifetime is that the revocable trust gives you
– the grantor – no protection. Of course, other differences
exist between the two types of trusts.
Your objective is to have a creditor-proof trust safeguard your beneficiaries'
interest in the trust assets. For this, you'd incorporate trust provisions
that prevent the beneficiaries' creditors from claiming their share
of either the trust principal or income. "Anti-alienation" or
"spendthrift provisions" directly protect the trust assets from
the beneficiaries' creditors. The anti-alienation provision prohibits
the trustee from transferring trust assets to anyone other than the beneficiaries.
Excluded parties are creditors of the trust's beneficiaries.
Spendthrift and anti-alienation clauses expressly preclude parties whose
interest is adverse to the beneficiaries (a creditor, ex-spouse, etc.)
from claiming the beneficiaries' share of the trust principal or income.
Spendthrift provisions are vital for every trust. If the trust for your
children lacks this protection, see your attorney or your money could
end up with your ex-son or daughter-in-law, or your children's creditors.