In my last blog post, I talked about how a living trust does not protect assets from creditors in Colorado.  If you want to protect your own assets, you need to use an irrevocable trust.  However, if you want to protect assets for your children, you can provide that type of asset protection in your revocable trust.

Your revocable trust can be changed, amended, or revoked by you while you are alive.  After your death, the trust cannot be changed, and it becomes irrevocable.  You are setting up a revocable trust for you, but the same trust can be irrevocable for your children.  Since the trust becomes irrevocable when you pass away, you can setup the trust to protect assets for your children.

 

You Need to Include the Correct Provisions in Your Trust to Protect Your Children

When you die, your trust survives your death.  The terms of the trust then are what dictates who gets assets and under what conditions.  Many trusts will distribute assets outright to children.  Distributing assets outright doesn’t give asset protection.  To protect assets for your children, you would need to restrict access to the assets of the trust.  You cannot just give the children the ability to access the assets in the trust at any time.

You can set up different restrictions on the trust assets, like age restrictions, use restrictions, or even other restrictions.  If you do not allow your children to access assets in a trust until a certain age, those assets are protected until the assets are distributed to the children.  A restriction on usage is often something that says trust assets can be used for certain types of expenses, but not others.  I see this a lot in allowing assets to be used for educational expenses, like college or university studies, but not for other uses.  I also see where assets are to be given only to the named beneficiaries and not to other family members, spouses, or former spouses.  When a child is going through a divorce, or has an ex-spouse that wants to get whatever money they can, parents often want to restrict the ex-spouse’s access to inheritance money.  In doing so, the parents can assure the money they leave to their children is not picked up by an ex-spouse who is looking for more money in spousal support or alimony.

 

You Can Protect Assets From A Child’s Creditors 

Restricting a child’s access to the trust funds by giving the trustee authority to distribute or deny a distribution to the beneficiary child can give creditor protection.  A creditor can only collect against assets that are owned by the child, or assets to which the child has access, or what is termed “incidents of ownership,” like control over how a property is used or can be used, or will be used in the future.  By limiting a child’s access to trust assets, you can protect assets from creditors being able to reach the assets.

Usually, the best, and easiest way, to do this is to give your successor trustee the ability to make discretionary distributions to a named beneficiary child.  If you give the trustee the ability to deny distributions to unauthorized parties, then the child’s assets in trust are protected from collection.  Denying distributions to unauthorized parties – like a creditor, or denying distributions that may be too large – so any excess distribution might be claimed by a creditor – creates the assets protection for a child.  Of course, such restrictions on distribution can be cumbersome and more difficult to administer, but they can definitely be worth it.

I have had a client who had a child who owed the IRS over $500,000 and another client who owed an ex-business partner over $1 Million in debts from a business.  These clients did not want their money to go straight to the IRS or the ex-business partner at the time of the parents’ death.  Instead, they wanted the inheritance money to be used to pay for living expenses for the child as the child tried to get out of debt.  We established trusts to give each respective child the chance to use the money for necessary living expenses, but not be given in such a way that the creditors could claim the full amount of the inheritance.  Each set of parents was able to protect assets for their children to use inside of a trust, and they just had an independent trustee who could say “NO!” to the creditors.

 

Not All Children Need Creditor Protection

Not all children need protection from creditors.  Most children either don’t have huge debts, or have manageable debts, like a regular mortgage, or some credit card debt.  In these cases, you are fine to set up a trust that can leave assets outright to your children through a trust.  However, if your child has a greedy, needy, or opportunistic ex-spouse, or has large debts, then you may want to consider setting up asset protection for your children in a trust.  Balancing the inconvenience of setting up protections with the ease of access is something you want to discuss with an experienced estate planning attorney.  To make an appointment to talk to an attorney about what would be the best thing for you, please click the link below.