Updated: Aug 28, 2021
In planning how to pass their wealth to the next generation, many parents are under the mistaken belief that trust planning is only for the very wealthy or those with minor children. To the contrary, sensible trust planning can be used by many clients to protect assets left to their children from divorce, lawsuits and other creditors.
These trusts are written in a way that makes the inheritance available for use by the beneficiary while increasing the protection from the claims made by a divorcing spouse, litigant or other creditor.
In California and other community property states, it is assumed that anything owned or acquired during a marriage is marital property. If your child is married and later gets divorced, your child’s ex-spouse could suddenly be entitled to half of the marital assets. Although inherited assets are generally considered to be the separate property of the inheriting spouse, these assets (if owned outright) can all too easily become commingled with community assets, opening them up to judicial scrutiny during a divorce.
On the other hand, if you left your child’s inheritance in a properly drafted trust, your child’s inheritance would be protected from judicial division (it may, however, still be considered by the court when calculating spousal or child support).
Even responsible children with very little existing debt could use creditor protection for their inheritance. What happens if your child gets into a car accident and gets sued? Imagine that a judge finds your child responsible for the accident. All of a sudden, your child’s assets, including their inheritance, becomes fair game for the payment of the judgement.
On the other hand, if you left your child’s inheritance in a properly drafted trust, the inheritance would be protected from a judgement against your child.
Predators are those unscrupulous friends, relatives, significant others, etc., who may be looking to prey on your child to gain access to their inheritance. If your child owns their inheritance outright, the friend, relative, or significant other could convince your child to start making distributions to this person or to make unwise investment decisions (such as this person’s fledgling new business venture).
On the other hand, if you left your child’s inheritance in a properly drafted trust, your child would be a much less desirable mark for such predators.
Asset protection planning encompasses a wide range of different techniques, ranging from reasonable barriers to a system of incredibly convoluted roadblocks. Asset protection planning should be carefully tailored to your individual circumstances and your tolerance for complexity.