Living Trust with Lifetime Protection Trusts
If you have children, you’re probably planning on leaving your estate to them when you and your spouse pass away. Establishing a living trust is usually the best way to set up your estate plan, because it can eliminate probate and saves your family a lot of time and money.
But establishing a basic living trust won’t protect your children’s inheritance from divorce claims and lawsuits. With most living trusts, mom and dad’s assets are distributed directly to the children when the children reach a certain age. The problem is those assets can be taken by a divorcing spouse or a plaintiff in a lawsuit.
Why Lifetime Protection Trusts Are Important?
Mom and dad pass away and their living trust instructs the trustee to liquidate and distribute the assets equally to their children, Kathy and Bob. Each child receives a check for $300,000.
Lifetime Protection Trusts Protect Assets from Divorce
Kathy deposits her check in her bank account, which happens to be a joint account with her husband. Without knowing, Kathy took what was her separate property (in California an inheritance is separate property) and converted it to community property when she made the deposit. A few years later, Kathy’s husband files for divorce and makes a claim for half the inheritance.
Lifetime Protection Trusts Protect Assets from Lawsuits
Bob deposited his check in his bank account and on the way home from the bank, he rear-ended someone who suffered severe injuries. The injured driver sued Bob and won a judgment for more than Bob’s auto insurance limits. Bob’s personal assets, including the inheritance, must be used to satisfy the judgment.
In both of these scenarios, the inheritance would have been protected and mostly off limits to a divorcing spouse or plaintiff if mom and dad had included what we call “Lifetime Protection Trust” provisions in their living trust.
Instead of writing the living trust so that Kathy and Bob receive their inheritance outright, the trust could be written so that Kathy and Bob receive their inheritance in separate lifetime protection trusts. Kathy’s check would be written to Kathy Lee, Trustee of the Kathy Lee Trust. Same for Bob. Each could be trustee of their own trust and have control of how to invest and when to take distributions. But, because the trust owns the assets rather than Kathy and Bob, the assets will be significantly protected from Kathy and Bob’s divorcing spouses or creditors.
When you establish or update your living trust, you can do more than eliminate probate. You can include lifetime protection trust provisions to better protect your children’s inheritance from divorce claims and lawsuits.