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Asset Protection Planning for your Beneficiaries

How many ways are there to distribute an inheritance? Basically there are two ways: outright, and in Trust. An outright gift provides no protection, and no direction.

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How many ways are there to distribute an inheritance? Basically there are two ways: outright, and in Trust. An outright gift provides no protection, and no direction. Now, if you have a beneficiary that is absolutely fantastic with handling money, and you have no concerns about creditors, predators, divorce, the possibility of losing means tested public benefits such as Medi-Cal or SSI, or concerns about the beneficiary’s own self-destructive tendencies, then outright is likely the best choice.

The second method of distributing an inheritance is in Trust. Here, by using a Trust-style distribution, is where we have many options from which to choose. A Trust can be designed to provide a lot of protection, to very little protection and control. Something to keep in mind is that in creating your Trust during the estate planning process, you can provide better asset protection than any type of asset protection the beneficiary can design for themselves if they were to receive the inheritance outright, and for far less cost.

Degrees of Protection Various Trusts Provide

Starting from one side of the spectrum, a Trust can be created that provides no protection from creditors or predators. These types of Trusts are usually called an Unlimited Demand Right Trust. So why choose such a Trust? Because it does provide some other benefits that a Settlor may find desirable.

For example, what if the beneficiary does no estate planning of their own? Well, in California, the Probate court steps in and California gets to decide. I don’t know about you, but I don’t want the Probate court making my decisions for me. Another benefit is that every time the beneficiary does a distribution, they are likely thinking about the people that gave them the gift in the first place.

They may even treat the money with more respect if they think they are spending “mom’s money” instead of their own. Moreover, as the Settlor, you can provide precatory guidelines for how you would like the property dealt with or spent. Because the guidelines are precatory (wishes) they are not a means of enforceable control. Another benefit to this type of Trust is that the Beneficiary can withdraw all of the property from the Trust if he or she so desires.

So if the Beneficiary has some emergency or urgent need, he or she has access to all of the funds. However, if the Beneficiary leave the money wherever it sits, they would not commingle the money with a spouse like they might if given the distribution outright. So this type of Trust does provide some divorce protection. California is a Community Property state, and income is generally presumed to be community property (half is the property of the wife, and half is the husband’s).

Gifts from bequest, devise, and descent is the receiving spouse’s separate property. However, if money is commingled, it can be difficult, expensive, and perhaps impossible to prove how much if any remains separate property should a divorce occur. No fun to think about, but things happen. At the other side of the spectrum is the Totally Discretionary Trust which provides just about the maximum amount of asset protection.

With a Trust of this kind, the income is distributed by an independent Trustee (a person other than the Beneficiary) totally at the Trustee’s discretion. Because of this, and other aspects that are built into the Trust, Creditors cannot force the Trustee to make a payment to the Beneficiary because it is not an asset of his or hers.

The chance of undue influence on a weak Beneficiary is also reduced again because the Trustee cannot force a distribution, therefore predator protection is greatly increased. Keep in mind that there are possibilities in-between that can be used to customize the level of protection you wish to provide.

It is certainly not a choice of either an Unlimited Demand Right Trust, or a Totally Discretionary Trust. My most important job is to listen to your wishes then suggest solutions. Call today and let’s start planning! Thanks for reading! Dan Powell 619-980-2297

****Reminder****

Just like my website, nothing in this blog is intended as legal advice. If you need legal advice, contact an attorney licensed to practice in your jurisdiction. I am licensed to practice law in California. Further, please remember that I speak in generalities in my blog (and on my website). There are so many different factors that can contribute and completely change the outcome that it would not be practical to discuss all of them here. This is why I speak in generalities. Thanks again for reading.

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