You have worked hard to build you savings and wealth. Having a comfortable financial cushion is an important way to protect those you love. But what about after you’re gone? It is challenging and can be quite expensive for you to protect your assets during your life so that you can use them but that your creditors cannot reach them. At Clarity Legal Group® we do asset protection planning for our clients. When I review the pros and cons of putting this asset protection in place for a client during his or her life, clients are often looking for a plan B — something which provides less protection but also less cost and more control.
The opposite is true when planning for those who might inherit from us. Providing a high level of asset protection without keeping your loved ones from enjoying the benefits of their inheritance and without extraordinary cost is easily done. Indeed, at Clarity Legal Group®, our view is that you have not at least considered putting asset protection in place for those who will inherit from you, then you have not had comprehensive estate planning.
For most of our clients, a primary estate panning goals is to protect and provide for loved ones after you are gone. The idea that the assets you pass down to those loved ones might be wasted or squandered probably doesn’t sit well with you. The idea that a loved one might be sued over a business transaction or arising from professional services and end up losing their inheritance is no small concern. In addition, a lot of our clients are concerned that a child who is to inherit from them might get divorced and that an inheritance which is unprotected might end up lost in part as a result.
Asset Protection Planning takes a different face depending upon what category of concern you have. Do you have (1) a beneficiary who makes bad choices and needs to be protected from themselves; (2) a beneficiary who already has liability or creditor problems; (3) a beneficiary who lives beyond his or her means or otherwise spends money too freely (or has a spouse who spends too freely; (4) a beneficiary who makes great decisions but is in a high liability business or profession; (5) a beneficiary whose circumstances don’t allow him or her to provide for his own retirement savings. All of these are an occasion to apply an asset protection trust as the vehicle for inheritance, but each of them is different, and the structure and provisions of those trusts should be different depending upon the circumstances. Again, helping clients set up Asset Protection Trusts (sometime called spendthrift trusts) is a big part of the planning provided by the Estate Planning Attorneys of Clarity Legal Group®.
The Spendthrift Beneficiary
Do you have an adult child, or other beneficiary, who qualifies as a spendthrift? This is someone who never seems to be able to handle money and/or who spends way more money than he/she should. Most families have one. Sometimes the lack of financial acumen has an actual cause, such as an addiction problem or a mental illness. For other spendthrifts, there is no obvious reason why they don’t handle money well; however, it is a universally agreed upon fact that money management is not their strong suit. Understandably, the thought of handing a spendthrift beneficiary a sizeable inheritance likely makes you nervous. In this case, your own Will or Revocable Living Trust should provide that the beneficiary inherits in an Asset Protection Trust after your death. This Trust will have a third party — chosen by you — who will apply the assets in the Trust to pay for the needs of your beneficiary. You will leave in the Trust Agreement clear instructions and guidelines for how the assets will be used, and the instructions will be different, depending upon the particular concerns for the beneficiary.
Asset Protection as contingency planning
What if your child or other beneficiary has no problem with creditors or bad decisions but you still like the idea of provided some protection for life’s uncertainties. Is there a way to protect them from life’s uncertainties? The answer is absolutely yes! At Clarity Legal Group® we often provide an Asset Protection Trusts as a tool which we hope is never needed. We build triggers into the trust allowing the beneficiary more freedom of control and use over the Trust while still creating the asset protection and divorce protection. This allows the beneficiary to fully enjoy the use of his or her inheritance while provide an Asset Protection Trust which works like an insurance policy of sorts.
How does planning for asset protection work?
The legal documents which are part of your estate planning have to define the asset protection trust for those who inherit from you and this must be in place before you die. Because this involves the creation of this trust for those inherit from you, it is common for the Asset Protection Trust to built into a management trust such as a Living Trust (although it could also be built into a Last Will and Testament). Good planning always asks who should inherit, when they should inherit and how they should inherit. In this case, the Asset Protection Trust is defined in the legal document before you die, is formed after you die as a vehicle to receive the inheritance, and then functions as an ongoing entity to support and protect the beneficiary for the rest of his or her life — or for any such shorter period you might define. Very specific language must be used to create a spendthrift clause; however, it will be different depending upon whether the goal is to protect the beneficiary from his own poor spending habits, to protect against an existing problem, to protect against known creditors or instead potential future creditors. In short, a trust wraps the trust assets in a layer of protection against both outside claims to the assets and against the beneficiary’s inability to handle money while still using the money for the beneficiary.
Limits to the Protection Offered by a Spendthrift Trust
The creation of an Asset Protection Trust is governed by the laws of the state under which the Trust Agreement is created. It is important to know that often the laws of the state in which the beneficiary resides will control the rights of a creditor with respect to a trust. Thus, if we are planning to protect against known creditors, the Asset Protection Trust provisions will need to be drafted with an understanding of the laws of that state as well if the beneficiary doesn’t live in North Carolina. One reason for flexibility in the Trust Agreement is that for most of us, our beneficiaries might move from time-to-time, even after our deaths.
While most states do recognize and enforce spendthrift trusts, the protection offered does have limits. North Carolina is generally generous in affording asset protection for properly drafted trusts. In North Carolina, North Carolina General Statutes § 36C-5-502 governs spendthrift provisions, stating as follows:
(a) A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary’s interest.
(b) A term of a trust providing that the interest of a beneficiary is held subject to a “spendthrift trust”, or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary’s interest.
(c) A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, except as otherwise provided in this Article, a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary.
That statutes goes on to explain the limits to the protection offered by a spendthrift trust in § 36C-5-503(b) which reads, in pertinent part, as follows:
“Even if a trust contains a spendthrift provision, or if the beneficiary’s interest is a discretionary trust interest as defined in G.S. 36C-5-504(a)(2) or a protective trust interest as defined in G.S. 36C-5-508, a beneficiary’s child who has a judgment or court order against the beneficiary for support or maintenance may obtain from a court an order attaching present or future distributions to or for the benefit of the beneficiary. The court may limit the award to relief that is appropriate under the circumstances.
In other words, although a spendthrift trust can protect an inheritance from numerous potential threats, it cannot protect the assets from a valid claim for child support owed by the beneficiary.
Contact a Chapel Hill Trust Attorney
If you have additional questions or concerns about how to create or utilize a Asset Protection Trust, it’s one of the things we do at Clarity Legal Group®. Please contact a trust attorney at Clarity Legal Group® by calling us at 919-484-0012 or contact us online.