revocable living trust

Trust is like a safe have you given your combination away?

It is so important to have a revocable living trust. We got a call last year from a middle-aged man whose parents had died and left him a nice inheritance. His parents had a trust which said, “After both of us have died, give the money in the trust to our son.” He was about to receive his money, but he was worried, because he had recently been sued, and had just gotten a court order/judgment against him. He asked us, “Can my creditors get their hands on my inheritance?” Answer: “Yes. Hand it over.” His parents had hoped that he could use that money to have a nice retirement, but he never saw a dime of it.

His parents gave the combination to the “safe” to their son’s creditors.

Trusts do many things, but one thing they do particularly well is protect inheritances from the creditors of the trust beneficiaries. Suppose the parents’ trust had said, “After both of us have died, continue to hold the money in trust for our son, and use it for his benefit for the rest of his life.” If they had done that, then their son’s creditors would have been out of luck.

But wouldn’t that have involved a lot of trustee’s fees? Not necessarily. If the parents had named a Corporate Trustee (bank or trust company), they would have charged their typical fees of around one to two percent of assets, which (1) is probably about what an investment portfolio manager would charge anyway, even without a trust, and (2) seems like a small price to pay to avoid losing the inheritance to creditors. Corporate Trustees are well worth their fees, especially when the beneficiary is a minor, incapacitated, a spendthrift/gambler/shopaholic, naive about investing, in a shaky marriage, or in a high risk occupation.

If using a Corporate Trustee does not appeal to you, you can name the beneficiary as Trustee of his or her own inheritance and still receive the creditor protection.   In 2010, the Arizona legislature passed a statute that says, in most cases, a beneficiary’s creditors cannot get at an inheritance that is held in trust, even if the beneficiary is also the trustee! That sounds too good to be true, and maybe some day a court will rule that it is too good to be true. But for now, the smart plan is to leave your children their inheritances in trust for their lifetimes, either with a family member, friend or corporation as Trustee, or even with your children as their own Trustees.

Before you ask: no, you can’t use your trust to protect against your own creditors, unless you make the trust irrevocable and give up all control and access – which most people aren’t willing to do. But to protect your children, review your “safe” to make sure you haven’t given the combination to your children’s creditors. (And maybe drop a hint to your parents that you wouldn’t mind getting your inheritance in trust instead of outright.)