Protecting Heirs with Trusts

Creditor and Divorce Protection

Trusts are powerful tools for safeguarding your heirs' inheritance, particularly from creditors and divorce settlements. By placing assets in a trust, you can shield them from creditors seeking to claim a beneficiary’s inheritance due to debts or financial troubles. Additionally, inherited assets held in a trust are generally considered separate property, offering protection in the event of a beneficiary’s divorce. This ensures the inheritance remains with your intended heir rather than being divided in a settlement. To enhance protection, a trust can allow beneficiaries to decline serving as their own trustee, preserving creditor safeguards while maintaining flexibility. While trusts involve some administrative tasks, such as filing separate tax returns, they provide robust security for your heirs’ financial future.

Postponement Provisions: Protecting an Inheritance

Trusts can include postponement provisions to protect heirs who may not be ready to manage their inheritance wisely. These provisions allow a trustee to delay distributions if a beneficiary lacks maturity, judgment, or financial responsibility. For example, if there are documented concerns—such as reckless spending or significant personal issues—the trustee can hold back funds until the beneficiary is better equipped to handle them. This tool is used sparingly and reserved for significant situations, not minor concerns. Additionally, age-based restrictions can prevent forced distributions at specific ages (e.g., 25, 30, or 35), giving trustees flexibility to act in the beneficiary’s best interest and ensuring the inheritance is managed responsibly.

Real Life Example

During a planning session our client mentioned their only child and sole beneficiary was very unhappy in their marriage. Upon the parent/trustors passing the beneficiary was educated on how to protect their inheritance from a future divorce they should ever want one. They new what things to avoid in the years ahead. The beneficiary heeded our advice and finalized her divorce several years later. During the process the former spouse had every intention of claiming their portion of the inheritance. Their attempt was thwarted and the beneficiary's inheritance was protected.