Asset Protection for Beneficiaries Using Discretionary Lifetime Trusts

How to Protect Your Beneficiaries from Themselves, Creditors, and Divorce

Grandmother and granddaughter smiling

When exploring the options for passing your property on to your beneficiaries after your death, including your spouse, children and any other beneficiaries, one option that must be considered is holding the property in a separate, discretionary lifetime trust for each beneficiary. Why? Because this will provide asset protection for your spouse and other beneficiaries by creating a legal barrier between the property held in the trust and the beneficiary's creditors or a divorcing spouse.

Asset Protection Using Discretionary Lifetime Trusts for Minor Beneficiaries

If the beneficiary is a minor, then a trust will be required in order to keep the beneficiary's inheritance outside of a court-supervised guardianship or conservatorship. But many parents and grandparents choose to terminate a minor's trust at a specific age, such as 25, 30, or 35, which is at a time when they believe that the minor will be able to invest and manage their own inheritance. Once the beneficiary reaches the specified age, however, and the trust is terminated by distributing the assets remaining in the trust outright to the beneficiary, then the property will be considered the beneficiary's own property and automatically become subject to the creditors' claims of the beneficiary, including judgment holders in lawsuits and a spouse during a divorce.

Instead, consider continuing the trust for the benefit of the young beneficiary during their entire lifetime.

If drafted properly, as the beneficiary gets older the discretionary lifetime trust will create an asset protection barrier between the beneficiary and the beneficiary's creditors so that if the beneficiary gets sued or gets married but then goes through a divorce, the assets held in the beneficiary's discretionary lifetime trust will remain in the trust for the beneficiary's benefit and out of the pockets of a creditor and divorcing spouse.

Asset Protection Using Lifetime Trusts for Adult Beneficiaries

If the beneficiary is already an adult, then you should still consider setting up a discretionary lifetime trust for the benefit of the adult beneficiary, even including your spouse, for the very same reasons - lifetime asset protection against creditors, judgments, and divorcing spouses.  For your spouse, the AB Trust or ABC Trust can be designed to include asset protection for your spouse.

Aside from this, if you already know that the adult beneficiary is not good with managing their own money or you're afraid that the beneficiary will spend their inheritance on shoes, jewelry, cars, and vacations, then the discretionary lifetime trust can be drafted to not only protect the beneficiary from outside influences, but also from the beneficiary's own bad decisions or excessive spending habits.