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CREDITOR AND PREDATOR PROTECTION WITH TRUSTS
"REASONS YOU OUGHT TO AND NO REASON NOT TO?"
By Kevin Purcell ©2007, 2008, 2009, 2010
One of the most powerful tools in estate planning is the use of Trusts. As one famed New York commentator has put it, “One major mistake made in estate planning is the failure to use Trusts to the maximum extent the law permits. Trusts are probably the most important development under English common law…[and] in many ways the most powerful and important tool in estate planning. Unfortunately, Trusts are not used with the frequency or duration they should be”. [1]
In the estate plans I draft, I not only create, when appropriate, multiple Trusts, but more frequently, I will draft “Trusts within a Trust”. Do you know the difference between a ship and a boat? A ship is a vessel that can have other vessels placed in or on it. A boat can not. Fortunately, Trusts are ships, not boats. A Trust can contain other Trusts that can be placed “inside” the main Trust to achieve a wide range of advantages for the client.
MAXIMIMIZING PROTECTION FOR YOURSELF—THE BRAVE NEW WORLD OF TRUST PLANNING
Many people—even lawyers—will tell you that in Ohio you cannot protect your assets while you are alive from your own creditors. This belief is simply not true. A revolutionary new set of trusts, referred to as “MITS.” or “My Income Trusts” © Kevin Purcell, MPS, LLC. 2008, 2009, 2010 and “FITS,” or “Family Income Trusts” © Kevin Purcell, MPS, LLC, 2008, 2009, 2010 allow you, the client, to set up a trust that will protect your assets from most of your future creditors while you are alive. And you don’t have to go to Alaska, Delaware, or to some offshore, foreign island to accomplish it! It can be done right here in Ohio. Your assets stay here managed by your current financial advisor. And they stay safe from those “creditors and predators”.
These trusts are fast becoming the preferred choice of planning for clients seeking to avoid the high cost of nursing home care and to those clients, say, in high-liability professions, who have substantial assets and want to protect those assets from future creditors.
Call us if you are interested in these exciting new breakthroughs in estate planning.
MAXIMIMIZING PROTECTION FOR YOUR LOVED ONES
One of these advantages is what I call “creditor and predator protection” for the beneficiaries of the client who establishes the estate plan. Fact: If you leave assets to a loved one outright, you are providing that loved one with zero (as in zilch) protection from “creditors and predators”.
Who are these “creditors and predators”? Let me give an illustration. It is intentionally a little overblown to cover just six of the literally dozens of examples I could cite:
In your Will, you give $50,000 to your older son, $50,000 to your younger son, $50,000 to your older daughter, $50,00 to your younger daughter, $25,000 to each of your three grandchildren, and the rest of your assets to your spouse.
1. Creditor protection: Your older son gets into a bad business deal to the tune of $40,000. Further, he has $15,000 in credit card debt. Poof. His inheritance is gone.
2. Substance-abuse protection: Your younger son is fooling around with alcohol and drugs. With $50,000 falling into his lap, in six months he is broke and in a half-way house badly addicted to one or more of these substances. And drug pushers and State liquor stores have your money. Sadly, the inheritance made his life far worse, exactly the opposite of your well-meaning desires (an all-too-common problem of outright bequests).
3. Divorce protection: Your older daughter inherits outright the money you gave her, and she and her husband invest it together with their financial planner. A few months later he files for divorce, splits for Maui with his new love interest while his divorce lawyer successfully makes a claim for half of the money that you gave outright to her as part of a property settlement. You gave half your money to your ex-son-in-law!
4. “Special Needs Trusts”: Your younger daughter is disabled and on certain government assistance programs. When she inherits the $50,000 you bequeathed to her, your daughter’s government benefits are stopped, and she must spend the $50,000 for her support and care instead. You paid your taxes, but the government is, in effect, your beneficiary a second time.
5. “Remarriage protection”: Your spouse inherits outright the rest of your life earnings. Several years later, she re-marries a nice enough guy, and she has a successful second marriage. In her Will, as you knew she would, she leaves all the assets you gave her to your common four children. But wait. Under Ohio Probate law, he “takes against the Will” and receives the first $40,000 “off the top” of her estate plus 1/3 of the balance of what you thought would go to your children. Unfortunately, they went to a stranger and then his family, not yours. Believe it. That’s Ohio law.
6. “Tender age” protection: Finally, your grandchildren get the money you bequeathed to them—but when? Under Ohio law, at age 18 any inheritance must be turned over to a beneficiary since that beneficiary is now legally an adult. Harley Davidson and Porsche dealerships are now your probable beneficiaries. And in a few years, your grandchildren will likely be left with a legacy of remorse and little else.
In all of these instances, the use of various Trusts could have prevented these “creditors and predators” from destroying your estate plan. And make no mistake, that is what these people you never even met have done. Look at who ended up with your assets. All of them are “unintended beneficiaries”. Are those not the fingerprints left on an estate plan gone wrong?
The solution in each instance was to have used a Trust inside your master Trust document to provide for the beneficiary while at the same time to protect the against the reach of the “creditors and predators” that abound.
CAN YOU TRUST YOUR TRUST?
One of the purposes of this article is to urge that the estate planning tragedies just discussed often happen but can be avoided through Trusts.
But just how reliable are Trusts? Do they really work? Are they a scheme by lawyers to charge a fee to “tie up” your money making it difficult for the beneficiary to enjoy it?
Let’s answer the last question first: The terms of a Trust for a beneficiary are up to you. You can make them as restrictive or as generous as you wish.
Strings of Love:
In the case of the minor grandchildren, of course you want to “put strings” on them getting at the money at their whim until they are older and more mature to handle it. The Trustee, in the meantime, can have discretion to make distributions, for example, for their health, education, maintenance, and support.
Love with No Strings Attached:
In the case of your surviving spouse, you likely may not want to tie up your bequest to him or her at all. We can draft the Trust to allow your spouse when you pass away complete access to the assets at his or her whim but in such a way that creditors and predators (such as new spouses) are restricted from getting their hands on them.
(Of course, in a second marriage situation, where you have children from a first marriage, we could structure the Trust in a way that would provide for your spouse’s interests and those of your children from the first marriage as well. The terms are up to you.)
In all of the situations described above, a Trust for the beneficiary in question could have been drafted to provide appropriate availability of the assets to the beneficiary but to have provided protection from the “creditors and predators” at the same time.
Are Trusts foolproof? No creditor-protection device is 100% foolproof. But consider this: “Pickpockets” are out there to get your loved ones’ money. They come in many different forms and attire, but they are out there. Should you place your money in a Brink’s truck, or just hand it to your beneficiaries to put in a pocket or purse, unprotected, waiting for the pickpocket to come along? Sure, a Brink’s truck occasionally gets robbed. I’ll still bet on the Brink’s truck. Most pickpockets, of course, won’t even try that one. And most plaintiff’s lawyers, who work on contingency (i.e. no recovery no fee), probably won’t even waste their professional time to attempt a break-in to a properly-drafted Trust.
TRUSTS—THEY’RE NOT JUST FOR AVOIDING PROBATE ANYMORE (Actually, they haven’t been for hundreds of years!)
As you have probably read,[2] Trusts are celebrated as the most comprehensive, foolproof way to avoid an expensive, public and time-consuming Probate proceeding upon your disability and your death. There is no doubt that the Probate-avoidance feature is a major advantage of owning all your assets in Trust. Trusts, however, are fabulous tools to accomplish so much more that cannot be achieved in their absence. Remember, estate planning is about control. With Trusts, you and not others exercise control over your money--even long after you have passed away, and those “others” are still around!
In short, regardless of whether your estate is modest or a fortune, a Living Trust can be the cornerstone to your personal legacy.
Do your loved ones deserve any less?
The above article was written by Kevin Purcell as a public-education service. For more information on this or other estate planning subjects, please visit our website or feel free to contact our law office in Rocky River, Ohio.
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