MARKET TREND: Interest in the family creditor protection offered by irrevocable trusts is on the rise.
SYNOPSIS: When creating legacy plans for their families, parents often are as concerned about creditor protection as they are about transfer taxes, especially as to how that protection relates to marital claims against their legacy. Leaving a child’s inheritance in an irrevocable trust can act as a substitute to a premarital plan, avoiding many of the difficulties associated with using and enforcing prenuptial agreements. To be effective, however, the trust agreement should not: (1) rely solely on a spendthrift clause, (2) provide the beneficiary with too much access or control, or (3) mandate trust distributions.
TAKE AWAYS: While parents generally want to protect their family legacy from in-laws, premarital planning is often difficult to discuss and implement. A fully discretionary trust properly administered by an independent trustee should offer enhanced creditor protection and may serve as an effective substitute for a child’s premarital plan. Parents should pay close attention to the trust’s jurisdiction, however, as the protections afforded to trust assets with regard to marital claims are highly dependent on applicable state law.
When leaving a legacy for children, parents are often concerned about creditor protection, especially as it relates to marital claims against that legacy should a child’s marriage end in divorce. Leaving a child’s inheritance in an irrevocable trust can act as a substitute to a premarital plan; however, parents should review the following “dos and don’ts” to enhance their trust’s overall creditor and family legacy protection.