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Protecting Inherited Assets from Creditors

Saving money is difficult.  It is no wonder, then, that most people are not excited about the possibility of creditors swooping in and taking the assets they leave to their heirs.  Fortunately, a well-crafted estate plan can be utilized to reduce this risk.

A common tool is to be to leave assets to your children in a trust that utilizes “spendthrift” planning.  Carefully crafted spendthrift planning will allow us make assets available to our children to support their existing lifestyle (e.g. during a hardship) or to increase their standard of living while still offering protection against a creditors attempt to obtain those assets.

As with most legal concepts, this type of planning requires careful planning.  The cautionary note with this type of planning is that the more guaranteed access that a beneficiary has to funds the less protection the trust provides against creditors.  For instance, if a trust provides that a set sum must be distributed on a set timeframe (i.e. weekly, monthly, yearly) then a court can order that those distributions be made directly to the creditor.  By contrast, if the trust uses more open-ended language to authorize distributions in the trustee’s discretion then it is much easier to thwart creditors.  Similarly, if the trustee is authorized to make payments directly to a beneficiary’s vendors or providers (so that is will bypass the beneficiary entirely) than it severely limits a creditor’s ability to reach the funds.

This issue is more important than ever following the Supreme Court’s 2014 decision in Clark v. Rameker[1].  In Rameker, the court found (to almost everyone’s surprise) that while an IRA is protected from creditor’s claims and inherited IRA (i.e. one left to your beneficiary) is not.  Accordingly, it is important to consider this issue and obtain advice from a qualified professional to figure out the best plan to protect your assets.

[1] https://www.supremecourt.gov/opinions/13pdf/13-299_6k4c.pdf

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