You can choose how you leave your estate to your children or beneficiaries. But, how you leave those assets to your beneficiaries may determine whether those assets are subject to divorces, creditors, bankruptcies, or lawsuits after your death. We recommend that you consider leaving assets to your beneficiaries in a lifetime asset protection trust. You can give your beneficiary the choice to protect those assets.
Early in my practice, two brothers came to see me after the loss of their father. Their father had a simple estate plan that left his estate equally and outright to his two sons. One of the sons was a chef and started a restaurant in Portland. You are likely familiar with the statistic that many restaurants fail in the first year. Those statistics were magnified during Covid. This son’s restaurant failed. He filed bankruptcy and sold the assets and inventory of the restaurant to pay investors and as many creditors as possible. That son received a fresh start. Unfortunately, his father died within 120 days of the close of the son’s bankruptcy. Under Federal Law, the bankruptcy trustee reopened the bankruptcy and took that son’s inheritance. I believe that their father did not work for over 40 years to have half of his estate go to a bankruptcy trustee.
What could their father have done differently? He could have given his sons their inheritance in trust instead of giving his estate outright to his children. In a well-drafted trust, those assets would not have been part of that son’s personal estate subject to federal bankruptcy laws.
Protection From Life’s Uncertainties
You cannot predict the circumstances of your beneficiaries’ lives on the day you die: will their marriage be on the rocks; will they have financial struggles; or will they be suffering from addiction? Many people believe that an inheritance is always separate property. That is not necessarily true. Many states, including Oregon, are considered an equitable distribution state for the division of property in a divorce. This means that an inheritance received, unless protected, may be considered marital property and available for division during a beneficiary’s divorce.
A lifetime trust or a lifetime asset protection trust can either be created as a stand-alone trust during your lifetime or, more typically, can be created on your passing in the language of your last will and testament or revocable living trust. We refer to trusts created from your will or revocable trust at your death as “testamentary trusts.” The recipient of your assets, whether a child or other person, is called a “beneficiary” of the trust. The person named to manage those funds is called the “trustee” of the trust.
At your death, your trustee or personal representative would establish their authority for and obtain tax identification numbers for each of these testamentary lifetime asset protection trusts. Title to inherited assets would transfer to the trust for each beneficiary instead of your beneficiaries’ individual names. The assets would not be owned by your beneficiaries in the eyes of the law but managed by a trustee for the benefit of your beneficiaries.
Depending on your comfort level, you can name each beneficiary to serve as trustee of their own trust. Alternatively, you can name a separate trustee to serve as a gatekeeper on those funds and work with your beneficiary in managing and spending those funds within the rules you put in place. You provide additional levels of asset protection by naming a separate trustee and even more protection by naming a separate professional trustee.
This tool allows you to give your beneficiaries protection they cannot create for themselves:
- Protection from creditors. A lifetime asset protection trust includes “spendthrift provisions” that limit a beneficiary’s control over assets. Spendthrift provisions protect assets in the trust from attachment by the beneficiary’s creditors.
- Protection from divorce. Oregon is an equitable distribution state for division of property in divorce. Unless properly protected, an inheritance could be considered marital property for division in a divorce proceeding.
- Protection from gambling, alcohol, and drug addiction. If you are concerned about addiction issues, you can include provisions that restrict distributions in the event of addiction or relapse. You can authorize your trustee to hire a gambling, drug, or alcohol counselor to evaluate the beneficiary. You can require drug screening. You can use trust funds to pay for the costs of recovery and treatment.
- Protection during incapacity. A lifetime trust is managed by a trustee. The trust continues to operate even after the beneficiary becomes ill or incapacitated.
- Protection over final distribution. You can direct who receives the final distribution of any remaining assets at the death of the beneficiary.
These are your assets. You can protect your assets by leaving your estate in trust to your beneficiaries in a lifetime asset protection trust. You can determine whether the beneficiary can have some control over how and when they receive those assets. Your beneficiary can choose how to invest those assets, where to buy real estate, and when to preserve family property. That lifetime trust can become a legacy that cascades down from one generation to the next. You can preserve your assets for the intended beneficiaries.
About The Author
© Collier Law 2021.
Ryan W. Collier is an Estate Planning and Probate attorney in Salem, Oregon and an Adjunct Professor of Law at Willamette University College of Law, teaching Will and Trust Drafting. Ryan is licensed to practice law in both Washington and Oregon. He is a graduate of the University of Puget Sound and Willamette University College of Law. His practice emphasizes advising clients on estate planning, probate, and trust administration.