If you’re going to make the effort to have an estate plan in place, it’s worth it to use a trust and include protective provisions. Protective provisions are important when you transfer your assets to someone else, usually at death. If the trust shares you create for your beneficiaries include asset protection (i.e. protective) provisions, the underlying assets can’t be seized by your beneficiaries’ creditors or divorcing spouses.
For example, look at the difference between Jan receiving her inheritance outright or in a trust with protection provisions:
An Outright Inheritance Can be Seized by Creditors
Rodger provided a $400,000 gift to his daughter, Jan, in his will. When Rodger died, Jan received $400,000 in an investment account, outright.
Jan, while chatting on her cell phone, ran a stop sign and caused a car accident. The family in the minivan she hit was seriously injured and a child was killed. Jan was sued.
Jan’s insurance only covered some of the damages. Her own assets, including her $400,000 inheritance, were seized and she lost everything.
An Inheritance in a Protected Trust Share Can NOT be Seized by Creditors
Same scenario as above, but this time Rodger used trust-based planning. He provided the $400,000 gift to Jan in an individual trust share, with asset protection provisions.
Jan’s own assets can be taken in the car accident lawsuit; however, the assets in the protected trust share cannot be seized.
When the lawsuit is over, Jan still has her $400,000 inheritance.
Jan Must Not Serve as the Only Trustee of Her Trust Share
For a clear level of asset protection, Jan must not serve as the sole trustee of her trust share. An independent trustee such as a bank or trust company can serve as the trustee; but as an alternative Jan can serve with the Co-Trustee of her choice such as a trusted CPA or attorney.
It is in your beneficiaries’ best interest for you to include protective provisions in your trust. Consult with a qualified estate planning attorney.