Most people consider the protection of their assets from their own creditors when beginning to plan for their estate. However, few consider the prospect of their heirs’ creditors. Adding spendthrift language to a trust may help safeguard their heirs’ assets.
A variety of trusts can be spendthrift trusts as long as a spendthrift clause is included. Despite its name, a spendthrift trust does not simply protect heirs from being recklessly extravagant or wasteful in their use of funds. Spendthrift clauses restrict a beneficiary’s ability to assign or transfer his or her interest in the trust and restrict the rights of creditors to reach the trust assets. If your child gets divorced, it can prevent your child’s spouse from claiming a share of the trust property. If your child predeceases his or her spouse, it can ensure that your children or grandchildren receive their inheritance rather than your spouse. A properly designed spendthrift trust can even protect your heirs’ assets from being attacked by frivolous lawsuits, dishonest business partners, or unscrupulous creditors.
There are, however, some limitations. Government agencies may be able to reach the trust assets, regardless of spendthrift language, to satisfy something like a tax obligation. Further, ex-spouses may be able to reach the trust assets to satisfy child support arrearages. Generally, the more discretion granted to the trustee the greater the protection against creditors’ claims.
If you are interested in learning more about spendthrift trusts or creating an estate plan, contact the San Jose estate planning attorneys at Lonich Patton Erlich Policastri, LLP. Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may include legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.