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Asset Protection Benefits of Creating Lifetime Trusts for Your Beneficiaries

How to Protect Your Beneficiaries from Themselves, Creditors, and Divorce


When exploring the options for passing your property on to your beneficiaries, including your spouse, children and any other beneficiaries, after you die, one option to consider is holding the property in a separate lifetime trust for each beneficiary. Why? Because this will provide asset protection for your spouse and other beneficiaries by creating a legal barrier between the property held in the trust and the beneficiary's creditors or a divorcing spouse.

Asset Protection Using Lifetime Trusts for Minor Beneficiaries

If the beneficiary is a minor, then a trust will be necessary anyway in order to keep the beneficiary's inheritance outside of a court-supervised guardianship or conservatorship. But many people choose to terminate a minor's trust at a specific age, such as 25, 30, or 35, which is at a time when they believe that the minor will be able to invest and manage their own inheritance. Once the beneficiary reaches the specified age, however, and the trust is terminated by distributing the assets remaining in the trust outright to the beneficiary, then the property will be considered the beneficiary's own property and automatically become subject to the creditors' claims of the beneficiary, including judgment holders in lawsuits and spouses during divorce.

Instead, consider continuing the trust for the benefit of the young beneficiary during their entire lifetime. If drafted properly, the lifetime trust will create an asset protection barrier between the beneficiary and the beneficiary's creditors so that if the beneficiary is sued or goes through a divorce, the assets held in the beneficiary's lifetime trust will remain in the trust for the beneficiary's benefit and be asset protected for the beneficiary's entire lifetime.

Asset Protection Using Lifetime Trusts for Adult Beneficiaries

If the beneficiary is already an adult, then you should still consider setting up a lifetime asset protection trust for the benefit of the beneficiary, including your spouse, for the very same reasons - lifetime asset protection against creditors and divorcing spouses.

In addition, if you already know that the beneficiary is not good with managing their own money or are afraid that the beneficiary would spend it all on shoes, jewelry, cars, and vacations, then the lifetime asset protection trust can be drafted to not only protect the beneficiary from outside influences but also from the beneficiary's own bad decisions or excessive spending habits.

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