There are misconceptions harbored about the way that trusts are used in the field of estate planning. One of them is the idea that you permanently surrender control of all assets that are conveyed into a trust. The assumption is that the assets would no longer be yours in a legal sense, so they would be protected from creditors or other litigants seeking redress.
It is true that there are irrevocable trusts that fit the description above, but there is a more commonly used type of trust called a revocable living trust. If you were to establish a revocable living trust, you would not surrender control of the assets.
The person that establishes a living trust, or any other type of trust for that matter, is called the grantor. There is a trustee that acts as the trust administrator, and there is a beneficiary that can receive distributions of assets from the trust. When you establish a revocable living trust, you can act as the trustee and the beneficiary while you are alive and fully capable of sound decision-making.
You would have the power to change the terms at any time, and you could revoke the trust entirely if you ever choose to do so. Because of this level of control, you would be retaining incidents of ownership when you establish and fund a revocable living trust. For this reason, assets in the trust would not be protected if you were personally sued for some reason.
As we have touched upon, there are irrevocable trusts that could be used to protect assets. One of them is the self-settled asset protection trust. They are legal in a limited number of states, but here in Ohio where we practice law, you can establish one of these trusts.
Generally speaking, assets in the trust would be protected from future creditor claims, but there are some types of debts that would still be collectible. These would include family support obligations, delinquent taxes, and some court judgments. This is one type of trust that can protect assets, but there are other possibilities.
Though a revocable living trust will not protect your own personal assets while you are still alive, things can change after you pass away. Let’s say that you want to provide for a grandson that is not very good with money. You are concerned about leaving him a lump sum inheritance, because he is likely to squander the money too quickly.
Under these circumstances, you could make your grandson the beneficiary of a revocable living trust that has a spendthrift clause built into it. You could instruct the trustee that will succeed you in the role to distribute $3000 each month to your grandson until he reaches the age of 50.
Once he attains that age threshold, you could allow the trustee to release the balance in full to your grandson. While the trust is intact, the beneficiary’s creditors would not have access to the assets contained therein. However, any resources that have been distributed to your grandson would be within reach of the creditors.
This is one simple example of how a spendthrift clause could be structured, but there are many different possibilities. It is all up to you, and this is one of the benefits that you gain when you use a living trust as the centerpiece of your estate plan.
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