Among the various estate-planning tools, trusts are perhaps the most effective in protecting assets. Wills provide a method of distributing your assets when you die, while trusts are legal entities that hold them and keep them safe. Credit shelter trusts, generation-skipping trusts and discretionary spendthrift trusts are especially useful because they generally cannot be accessed by creditors or former spouses.
Claims by Creditors, Ex-Spouses
If you have an ownership interest in a business, for example, it often makes sense to transfer it to a trust. If you personally own the interest, it will be vulnerable to claims by creditors. On the other hand, if the interest is placed into a trust, the trust owns it, and the trustee controls it. This ownership structure prevents creditors from reaching the property.
Also, in California most property you earn or otherwise obtain while married is jointly owned by you and your spouse. Therefore, keeping your business or personal assets in a trust can be wise should you ever get divorced.
If you choose to set up a discretionary trust with a spendthrift clause, you will select a trustee to control the trust assets; former spouses and creditors cannot access the trust’s assets or distributions, according to HuffPost. Credit shelter and generation-skipping trusts, or GSTs — two separate entities that can complement each other within your estate plan — are also protected from creditors and former spouses, according to Money Matters.
Fraudulent Transfers Prohibited
You must keep in mind that the law prohibits transfers of assets to keep them from a spouse at a time when divorce is a possibility. Any transfer, gift or sale of your business or personal assets that makes your spouse’s access to them difficult can be a fraudulent transfer, according to HuffPost. Even if a transfer took place several years before the divorce is finalized, a court can conclude it was made fraudulently and void the transfer.
To start creating your estate plan or to modify an existing plan to include the use of trusts, contact an experienced estate planning attorney to advise you and take the appropriate steps to achieve your objectives.