How Can a Trust Protect My Children’s Inheritance?

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One of the main reasons to do Estate Planning is to provide loved ones with protection from claims of future creditors and divorcing spouses or lawsuits (“Predators”). If you leave your property to your child as an outright distribution, the property will not be protected.

There is a longstanding concept in trust law known as “spendthrift” protection. These are provisions which provide that the Trustee will have sole control to make distributions from the Trust without interference from others. The spendthrift clause prevents a third party (i .e., a creditor or “predator”) from being able to compel the Trustee into making distributions of trust property for the benefit of the third party.

Under the spendthrift rules of most states, a person is free to leave assets in trust for another person, with specific language in the trust specifying who, besides a trust beneficiary, can have access to the trust assets. If the trust includes a “spendthrift” clause that specifically states that trust income and principal is not to be available for payment to a trust beneficiary’s creditors, then as a general rule the trust would be immune from attack by a beneficiary’s creditor. This sweeping protection would apply regardless of the amount or nature of a beneficiary’s liabilities, and would include protection of the trust assets if the child were to go through a divorce.

However, the extent of protection offered by a trust with a spendthrift clause will depend upon state law. Under some states, certain creditors are still allowed access to a trust. This could include a beneficiary’s obligations for alimony or child support, or payments to creditors who have provided certain “necessities of life” to the beneficiary.