Protect your loved ones Does your estate plan really protect your loved ones?

I saw an advertisement which said, “Let’s protect your loved ones with a Simple Will.” Does a Simple Will really protect the assets distributed to the beneficiaries? The answer is, NO. Any property devised to your beneficiaries via Simple Will has no asset protection feature and the beneficiary may lose all the assets devised by a will maker in a divorce, lawsuits, or bankruptcy. Also, Community Property Agreement has no asset protection mechanism provided to the surviving spouse, either. The surviving spouse may lose all the assets distributed to her/him by Community Property Agreement in one lawsuit involving a motor vehicle accident or some other form of litigation.

Beneficiaries in a Trust Are Accorded with Asset Protection

Either a Will Plan or a Living Trust Plan has trusts (generally, Credit Shelter Trust, Marital Trust, Descendants’ Trust, and Special Needs Trust), but the degree of asset protection features provided to the assets in the trust depends on the distribution standard and the enforcement right of the beneficiaries.

    Discretionary trusts have the strongest features of asset protection in the event that the beneficiary gets involved in any lawsuits, divorces, or bankruptcy.
  • Discretionary Trust
    Generally, a discretionary trust allows the trustee an absolute and sole discretion to make distributions of trust income and principal for the benefit of any one or more of the possible beneficiaries. Under the current Washington law (as of September, 2008), beneficiaries in a Discretionary Trust do not have a property interest or an enforceable right that a creditor can attach because a beneficiary has nothing more than a mere expectancy. In a marital property dispute, the WA Appellate Court held that “For purposes of Washington dissolution actions, property can be tangible or intangible, but it must be something to which there is a right. A mere expectancy is not a right and as such is not property.” Therefore, the assets in an absolute discretionary trust do not come before the court for property settlement when the beneficiary of the trust gets a divorce. A divorcing spouse of a beneficiary will not be able to access the assets in the trust.
    Discretionary trusts have the strongest features of asset protection in the event that the beneficiary gets involved in any lawsuits, divorces, or bankruptcy. (Under the Washington law, there is an exception in the context of a bankruptcy: a trustee in bankruptcy could reach a bankrupt beneficiary’s interest in a discretionary trust for debts incurred by the beneficiary in acquiring necessities of life.)
  • Support Trust
    Most support trusts are something like this: “The Trustee shall make distributions of income and principal for the beneficiary’s health, education, maintenance, and support.” The trustee is not allowed to exercise any discretion over whether s/he should make a distribution to the beneficiary or not because the distribution is mandated in the language. A beneficiary of this trust has a property right which is an enforceable distribution right to the income and principal of the assets in the trust. The beneficiary’s creditors can attach to the mandatory distribution stream of the beneficiary. Therefore, a determination must be made as to what constitutes the distributable amount considering the beneficiary’s ‘health, education, maintenance and support’. The standard in making a determination of this amount is the beneficiary’s accustomed standard of living when the trust was funded or at the time of the trust maker’s death.
  • Mandatory Distribution at Certain Ages of the Beneficiary
    This was a popular distribution standard a few decades ago. These trusts are something like this: “The Trustee shall make distributions to the beneficiary as follows: 1/3 of the principal and income at age 25; 1/3 of the rest principal and income at age 35; the rest at age 45.”
    In this type of trust, the beneficiary has a vested property right at each age and the beneficiary’s creditors (divorcing spouses and judgment creditors in lawsuits, etc.) can attach the entire assets and there is no asset protection feature provided to the assets in the trust. I almost always do not recommend this type of distribution to my clients due to the complete lack of asset protection.

I only explained three basic distribution standards and there are some more distribution standards which you can use for your estate plan. Which distribution standard and level of asset protection provided to your beneficiaries totally depends on each person’s goal for establishing his/her estate plan. For example, for a beneficiary who is involved in a high risk business, such as a medical or a legal profession, asset protection should be a vital component of your estate plan and Discretionary Trust would be the appropriate choice. Also, for a person who has a rather problematic child with a spendthrift propensity, Discretionary Trust should be the choice. For a client for whom wealth preservation is the major goal of his/her estate plan, Discretionary Trust is the appropriate standard. Please contact the office if you would like to discuss the asset protection issue or if you are not sure if your current estate plan meets your desired asset protection for the assets to be distributed to your beneficiaries.

Protect your loved ones

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category: Estate Planning, Trusts, Wills

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