Protecting Assets Against Your Children’s Creditor’s

Protecting Assets Against Your Children’s Creditors


Assets can be left to beneficiaries in any number of various ways, and the grantors are able to choose the “what, whom, how, and when.”  In discussing the options, it is often best to start by describing the two ends of the spectrum:

  1. Outright and Free of Trust – At one end of the spectrum is to leave the entire inheritance all at once, in one fell swoop. This is sometimes referred to as the “cash on the barrelhead” approach.  The beneficiaries are free to do with the assets as they please – spend them, invest them, etc.  The advantages of this approach are, of course, simplicity and accessibility.


  1. Held Back in Trust – The other end of the spectrum is to not leave the beneficiaries the entire inheritance all at once, but rather continue the trust, with the assets retained, to be held, managed, and distributed to the beneficiaries, over an extended period of time. The advantage of this approach is reducing the risk of loss of the trust assets due to the following reasons:


  1. Mismanagement. More than a few dollars are lost each day via fear, greed, ignorance, inattention, waste, mistrust, bad judgment, and lack of common sense.  A continued trust with professional money management can greatly reduce these risks.


  1. Taxes. The IRS takes different bites at different times – income taxes, estate taxes, sales taxes, etc. – but they all add up to a significant amount of a person’s assets.  Income and estate taxes may be reduced, simply because the continued trust is another entity – separate and apart from the beneficiaries.


  1. Divorce. Assets acquired during the course of a marriage – including inherited assets – are generally considered to be part of the “marital estate” and are therefore subject to division in a divorce proceeding.  Assets in a continued trust are not reachable by a divorcing spouse.


  1. Lawsuits. Lawsuits are increasingly common and can cause someone to lose a substantial part of their net worth.  Ongoing trust assets are similarly not reachable by lawsuit claimants.


  1. Bankruptcy. This is the ultimate depletion of wealth – a person losing all of his or her non-exempt assets due to the inability to pay off debts.  Assets held back in a trust are generally not subject to a bankruptcy.


Assuming one opts for the continued trust approach, the next issue is to decide upon the terms and conditions for the continuation.  The trust assets could be held for a period of time or for a beneficiary’s lifetime.  Distributions of income and principal could be either discretionary or mandatory.  Additional rights of a beneficiary to demand a withdrawal, remove a trustee, or re-write the trust can also be structured into a trust.  There are almost limitless options in this arena that should be discussed with knowledgeable estate planning counsel.


Written by:  Joshua C. Howard 

Related Practice Area: Wills, Trusts and Estate Planning