By Libby Banks, The Law Office of Libby Banks, PLLC

I am often asked whether the revocable living trust we use as the cornerstone of our estate plans provides asset protection––protection from the creditors of the person creating the trust. The answer is no. While the revocable trust is a great estate planning and probate avoidance tool, it is not an asset protection trust. When you create this trust, you still have full control over the assets in the trust. Because of this, the law recognizes that they are your assets, and your creditors can get to them in the same way as if they were in your personal name and not in your trust.

However, you can help your beneficiaries out by protecting their inheritance with a beneficiary asset protection trust. How do we do that? Instead of your trust saying that your beneficiaries get their inheritance outright (meaning the trustee simply writes them a check and they do with it what they want), your trust can direct that each beneficiary receives his or her share in a protective trust.

Protective Trusts Can Keep an Inheritance Out of the Hands of Creditors
These beneficiary trusts do provide asset protection for the trust assets. An outright gift of the inheritance can result in a beneficiary’s creditors snatching all your hard-earned money. But when you leave the assets in a protective trust, your beneficiary will not lose his or her inheritance to bankruptcy or other creditor issues.
Protective Trusts Can Protect the Inheritance in Case of Your Beneficiary’s Spouse, and Divorce or Death
Many of my clients like the idea of the beneficiary protective trust, especially after I mention that the trust can protect a beneficiary’s inheritance from his or her spouse. If a beneficiary has a marriage that’s a bit rocky will the inheritance end up in part in the ex-spouse’s name?

Leaving the inheritance in trust can assure that your beneficiary keeps the inheritance in a divorce. The assets held in trust won’t be divided up, because the inherited trust is separate property, belonging only to the beneficiary and not his or her spouse.

And what happens to the inheritance if your beneficiary dies after receiving it? With the protective trust, we can direct them to the beneficiary’s children or grandchildren. If your beneficiary puts the inheritance in joint ownership with his or her spouse, what happens when your beneficiary passes away? If their spouse remarries, there is a real possibility that the assets may go to the new spouse and not to your beneficiary’s children. Providing that the inheritance is to be held in a trust for your child, and then passes on to your grandchildren, can help prevent this unfortunate scenario.

If you’d like to discuss asset protection planning for your heirs – or if you are interested in the revocable living trust for your estate planning, visit my website at libbybanks.com or call 602-375-6752 for a free initial consultation.