Protection for Beneficiaries Using Discretionary Trusts

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When you're exploring your options for passing your property to your beneficiaries after your death, you might consider holding the property in a separate discretionary lifetime trust for each of them. Why? Because it will provide asset protection by creating a legal barrier between the property it holds and the beneficiary's creditors or if he becomes divorced. 

Lifetime Trusts for Minor Beneficiaries

If any of your beneficiaries are minors, a trust will be necessary if you want to keep their inheritances outside of a court-supervised guardianship proceeding or conservatorship proceeding. Minors cannot legally manage their own property or accounts, so an adult must do it for them. If you don't provide for your minor beneficiaries in your estate plan, the court will appoint someone to oversee their inheritances for them until they come of age. A discretionary trust avoids this. 

Many parents and grandparents choose to terminate a minor's trust at a specific age, such as 25 or 30—a time when they believe the minor will be mature enough to invest, spend and manage his own inheritance. The trust is terminated by distributing the remaining assets outright to the beneficiary when he reaches the specified age. At this point, the assets are considered to be the beneficiary's own property and they automatically become subject to the beneficiary's creditors' claims, if any, including judgment holders in lawsuits. They become vulnerable to a spouse in divorce proceedings.

But you can continue the trust for the benefit of the young beneficiary during his entire lifetime; there's no rule that says it must terminate at a certain age. If it's drafted properly, a discretionary lifetime trust can create an asset protection barrier between the beneficiary and the beneficiary's creditors as the beneficiary gets older. If the beneficiary is sued or gets married then goes through a divorce, the assets held in the discretionary lifetime trust remain there for his benefit and out of the pockets of creditors and his spouse because he does not technically own them—the trust does.

Asset Protection for Adult Beneficiaries

You can also set up a discretionary lifetime trust for the benefit of a beneficiary who is already an adult, even your spouse. You might consider doing so for the same reasons you created one for a minor—lifetime asset protection against creditors, judgments, and divorcing spouses. AB Trusts or ABC Trusts can both be designed to include asset protection for your spouse.

Common Sense

Aside from these considerations, these trusts just make sense for certain beneficiaries. If you already know that an adult beneficiary is not good with managing his own money and you worry that he'll deplete his inheritance on jewelry, cars, and vacations in record time, a discretionary lifetime trust can be drafted to not only protect him outside influences but from himself as well. It can safeguard his inheritance against his own bad decisions or excessive spending habits.