How to Protect Wealth With Trusts

by John Cromwell

A trust can be used to protect the trust creator's wealth, or to protect the beneficiaries' rights to the trust and future distributions. The beneficiaries' interest in the trust is normally protected through a spendthrift clause. A spendthrift clause protects against a creditor taking money out of the trust; however, once the trustee distributes money to the beneficiary, the creditor can seize those funds. The law regarding the creation of trusts vary by state. Twenty-three states have adopted the Uniform Trust Code as of 2012, with another three states considering adoption. When discussing general legal standards that apply to trusts, the UTC offers a good starting point.

Protect your loved ones by a legally binding will. Make a Will Online Now

Step 1

Ensure the purpose of the trust is legal and not contrary to public policy. A trust is considered illegal if it is meant to defraud creditors or others from receiving payment. As such, if you already owe a significant amount of money and then place your money into a trust to avoid paying off those debts, it is possible that a court would set aside the trust. Consider consulting with a licensed attorney to discuss you personal circumstances to ensure that creating a trust would not be considered illegal or against public policy.

Step 2

Determine if your state permits a trust creator to receive a beneficial interest from the trust that could not be claimed by the creator’s creditors. The UTC does not allow a trust to be a shield against the trust creator’s creditors if the creator is also a beneficiary; a creditor will be able to seize what a creator-beneficiary is due to receive from the trust. However, some states, such as Alaska and Delaware, allow immunity of a person’s interest as a beneficiary of a trust from his creditors’ claims. Consider checking your state’s laws on a creditor’s right to a claim of a creator-beneficiary’s share of a trust.

Step 3

Choose to make the trust irrevocable. When you transfer your property into an irrevocable trust, you give up all rights to the property. In an irrevocable trust, the creator does not control the property because he cannot unilaterally alter or terminate the trust. As a result, a creditor will generally be unable to seize any of the trust property to settle your debts if you are not a beneficiary to the trust.

Step 4

Draft the trust so the trustee cannot decide to transfer the entirety of the trust property to you, if you are a beneficiary. If a trustee can decide to transfer the entirety of the trust property to you, a creditor can seize all the trust property to satisfy your debt. If you created the trust and are a trustee in an irrevocable trust, a creditor can seize the maximum amount of property you can claim from the trust, making the trust an ineffective form of protection.

Step 5

Include a spendthrift clause, or provision, in the trust to prohibit any involuntary transfers to the creditors of all the trust's beneficiaries. Prohibiting the beneficiaries' creditors from seizing the beneficiaries' interests in the trust will protect against most claims. This includes protection from bankruptcy proceedings. A spendthrift clause can forbid beneficiaries from transferring their interests in the trust to anyone else. This prohibition must be included in the trust's terms. It means the beneficiaries are forbidden from selling their interests in the trust or transferring them of their own free will to settle debts. A spendthrift clause might read, "Spendthrift Provision. All beneficiaries' interests are protected under this spendthrift provision; no interest of any beneficiary in the income or principal of the trust prior to its distribution can be transferred by a beneficiary or taken by a beneficiary's creditor."