Preserve wealth for your beneficiaries using asset protection strategies in your estate plan

There are many techniques you can use to protect your assets after our passing for the benefit loved ones.  It’s about preserving your hard-earned wealth from the beneficiary’s unreasonable creditors’ claims, frivolous lawsuits, financial predators, poor decision making, the influence of an unscrupulous or financially inept spouse and other threats.

Assess the risk to beneficiaries of outright distributions

There are two primary ways to leave assets to a beneficiary: outright or in trust.  An outright distribution puts the asset into the legal name of the beneficiary.  This means there is no restrictions or protections around it; the beneficiary owns the asset.  A distribution in trust means that a trustee will hold legal title to the asset and the beneficiary will have beneficial interest in the trust assets.  The trust will whatever terms, provisions, restrictions, incentives, etc. that you determine will govern how and when assets are used for the beneficiary.

In determining whether to make a distribution outright or in trust, the first step is to assess the risk that creditors, former spouses, current spouses, or opportunists will go after your beneficiaries’ assets once you are gone.  Furthermore, you need to analyze and consider the relative ability of the beneficiary to manage the asset for himself or herself.  Do they make good financial decisions?  If the risk is relatively low that the assets will be attacked by third parties or squandered by the beneficiary due to poor decisions or inadequate management skills, but you seek added peace of mind for the benefit of your beneficiaries, you might consider the simpler technique of an outright distribution.  However, if the risk is more significant — for example, if your beneficiary is in a bad marriage, if your beneficiary has a disability, if your beneficiary has a substance abuse problem, if you beneficiary has poor financial management skills, if your beneficiary owns a business, or is in a profession with a high degree of malpractice risk or are involved in other activities that expose the beneficiary to potential financial liability — you might consider more sophisticated approaches like a trust.

If you choose the trust route because of a desire to protect the assets for your beneficiaries, consider using an independent trustee and giving that trustee full discretion over distributions from the trust. The combination of naming an independent trustee and a spendthrift provision could provide significant protection for the beneficiary during his or her lifetime while still allowing them to enjoy the benefits of the trust assets.  A spendthrift provision prohibits your beneficiaries from selling or assigning their interests in the trust, either voluntarily or involuntarily.  State laws will vary on what can pierce a trust even with a spendthrift provision.  For example, Georgia has several exceptions, including child support, alimony, intentional torts, and criminal restitution.

Start planning now

Whichever strategy you choose, it’s critical to start the discussions with your family and your estate planning professional.  People are often driven by a perceived need for simplicity for simplicity’s sake in estate planning; however, simplicity (i.e., an outright distribution to a beneficiary or beneficiaries) may be the absolute worse choose that can be made.  You should consider your options thoroughly with an estate planning attorney to customize a plan that meets the specific needs of you and your beneficiaries.

© 2018