Avoid Creditors In Probate By Using A Spendthrift Clause Or Trust

Imagine a scenario where you want to leave property or assets to a family member. The problem is that the person you want to leave the property or money to, has creditors. If you leave, for example, $100,000 to that relative, that relative may not get all that money, if that relative owes money to creditors, who will almost certainly make a claim through the probate process.

So is there a way to leave property to someone to make sure that their creditors don’t get their hands on what you are leaving to them? It turns out there is—it’s called a spendthrift clause or spendthrift trust.

Less Control is Better

As a general rule, the less control someone has over their money, the more protection from creditors there is.

So, let’s say you leave $100,000 to your brother. When you pass, that money is all his, to do what he wants with it, whenever he wants. That means that his creditors can come after that money.

But if you left the money in a trust, where a trustee determines when your brother gets the money, your brother has less control or access to the funds, but also, more creditor protection, because he has less say or control over the funds.

Using the Spendthrift Trust

One way of doing this is through what is known as a spendthrift clause or spendthrift trust.

A spendthrift trust releases funds in a trust to whomever you designate in increments, over time. The beneficiary only gets whatever part of the money you designate, when the trust says he or she gets the money. Usually, this will be when the beneficiary reaches a certain age, or accomplishes certain milestones, such as graduating college or getting married (whatever you designate).

You can also limit disbursements to things that are more discretionary, such as telling the trustee to give to a beneficiary “as needed for necessary living expenses.”

Either way, creditors cannot force any distribution from the trust, and when distributed, the amount distributed would be or can be structured to be small enough to avoid creditor claims or creditor interest.

Other Benefits

By the way, spendthrift trust has the added benefit of allowing you to make sure that your beneficiary doesn’t waste the money, in the event that you may question your beneficiary’s spending habits. Beneficiaries who are too young, who you think may not be responsible for the money, or who may not use the money responsibly if it was given to him or her all at once, may benefit from a spendthrift trust.

You, as the person who is creating the trust, can make yourself the trustee—but you should always designate a successor trustee to take over when you pass.

You can structure the trust as revocable, but that will have lesser creditor protection. An irrevocable trust will offer more protections, but as the name implies, you will need court action to change or dissolve the trust, if you ever need to do so.

Call the West Palm Beach probate lawyers at The Law Offices of Larry E. Bray today for help with your probate or estate questions, and for help during every stage of the probate process.

Sources:

trustandwill.com/learn/spendthrift-trust

metlife.com/stories/legal/spendthrift-trust/