I recently came across a question by a father. He wanted to know how to protect his inheritance that he wanted to leave to his son and daughter. The father had acquired about four rental properties and wanted to give his son and daughter two properties each. All the properties had no mortgages and were owned free and clear. Dad’s main question was whether he could protect these gifts from his children’s creditors, from their bad habits such as drug usage or spendthrift ways, and from his children’s spouses in the event of a divorce.
The short answer is that Dad can certainly protect his gifts from being eaten away by the elements of life. It is fairly easy to build this protection into your estate plan.
Creating Individual Subtrusts for Children
An easy way for families to maintain family wealth for their children is to create separate subtrusts for their children. Real property, cash, and other assets can be held on behalf of children by a trustee. That is the most effective way to protect your assets and keep them from being misused or ending up in the wrong hands. Subtrusts for your children with the proper spendthrift language in your living trust will make it very difficult for most creditors to seek property from the trust. If your child ends up in debt or legal trouble, your child is not the owner of any of the trust assets—the trust is. A person who is not the owner of assets cannot have a judgment or any other obligation levied on him or her. A well trusted third-party trustee such as another family member or trusted friend could shield your children by paying from the trust when they are not in legal trouble and not paying when trouble is on the horizon.
Many families can easily set up this protection in their revocable trust plan. And you can make changes to your trust at any time while you are living. It is a good way to maintain control of your assets so you won’t have to worry about them going somewhere you did not intend them to go.
