Contrary to popular media, asset protection planning is not synonymous with exotic offshore accounts. Many traditional estate planning tools can be extended to provide greater asset protection for the surviving spouse, children, and other beneficiaries. The failure to consider asset protection opportunities is one of the most often-missed opportunities in estate planning.
Many individuals are not equipped to handle large lump sums of money. Statistics indicate that most beneficiaries spend their inheritance within eighteen months. These issues can be particularly problematic for an heir with a history of alcohol or substance abuse. Even if the problem appears to be resolved, the grief resulting from your death, coupled with a substantial bequest, could result in a relapse.
Even responsible heirs may be at risk to creditor claims. Although an heir’s most likely future creditor is his or her current spouse, other potential creditors should also be considered. Asset protection is particularly important for heirs in high liability professions, such as real estate or medicine.
You can minimize many of these risks through asset protection planning. Although the full scope of asset protection planning is beyond the scope of this article, one reliable (if not exotic) solution is to incorporate asset protection benefits into a trust. Since trusts are commonly used in estate planning for other reasons, such tax planning or providing control over the timing of distributions, the estate planning process presents a prime opportunity to consider your asset protection options.
The following trust features can usually be easily integrated into your estate plan to provide asset protection benefits:
- Spendthrift Trusts. A spendthrift trust is structured to support a beneficiary while securing trust funds against creditor claims. Like every state, Mississippi recognizes the validity of spendthrift trusts that are set up for an heir’s benefit. A common example involves a parent setting up a trust to transfer the assets to their children but protects the assets from the claims of the children’s creditors (including ex-spouses).
- Discretionary Trusts. Discretionary trusts are a great asset protection tool. A discretionary trust gives the trustee the discretion as to whether (and when) to make distributions. Since the beneficiary cannot compel the trustee to distribute assets to the beneficiary, neither can his or her creditors. However, because the beneficiary is at the mercy of the trustee’s judgment regarding distributions, discretionary trusts are most appropriate when the trust creator is confident that the trustee will act in accordance with his or her wishes.
- Dependency Limitations. For beneficiaries that have dependency problems, a trust can include language that restricts the amount or use of distributions during the beneficiary’s dependency. Because these limitations depend upon the trustee’s awareness of the problem, this technique is most effective when the trustee is an individual with knowledge of the beneficiary’s condition.
These trust features will help you obtain often-missed asset protection benefit from your estate plan. By incorporating these techniques into your estate plan, you can help protect your beneficiaries from their own mistakes and the claims of others.