Leaving an inheritance in a properly designed continuing trust, rather than distributing it outright, may help protect assets from certain risks involving a beneficiary's divorce, lawsuits, or creditors. The protection is not automatic or absolute: trust terms, beneficiary control, applicable law, and actual administration all matter.
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Why Use a Continuing Trust Instead of an Outright Inheritance?
Once a beneficiary receives an inheritance outright, the money or property is generally under that person's control. A continuing trust can keep ownership and management within a trust while allowing the beneficiary to receive support or other distributions under specified conditions. See the firm's article on whether to give an inheritance outright or through a trust.
Can a Trust Help if the Beneficiary Gets Divorced?
It may. An inherited asset's treatment during divorce depends on the applicable law and circumstances, including whether the beneficiary has commingled it with other property. Trust terms that limit outright ownership and control may provide additional safeguards, but no document can promise a particular outcome in every divorce.
Does a Spendthrift Trust Stop All Creditors?
No. A valid spendthrift provision can restrict some creditor access to a beneficiary's trust interest, but there are legal exceptions and important differences between protection while assets remain in trust and after they have been distributed. A beneficiary's power to demand distributions or control the trust can affect the analysis.
Who Should Serve as Trustee?
Trustee selection matters. An independent or otherwise appropriately selected trustee with discretionary authority may offer a different level of protection from a trust that gives the beneficiary unrestricted access. Understanding trustee duties and responsibilities helps when weighing those choices.
Would a Separate Irrevocable Trust Provide More Protection?
For some families, an independently established irrevocable trust and lifetime gift strategy may be worth discussing. These arrangements can involve loss of control, tax considerations, administrative obligations, and other trade-offs. They require individualized advice rather than a one-size-fits-all template.
To discuss protective inheritance planning in California, contact Kavesh, Minor & Otis or learn more at its free estate planning seminar.
