Q: I want to protect assets from the woman my son is marrying—in case it doesn’t work out. How can I do that?
[david apted]
vice president/financial adviser, Smith Moore
The best way to protect marital property is to do so before the divorce. When leaving assets or income to your children, you can choose exactly the terms under which you want to distribute it. The terms can be as strict or flexible as you like. The first thing to do is create a will or a revocable living trust, so you can set out your intentions for the distribution of assets at the time of your death. Without these documents, you’re limited in the ways you can protect the assets you leave your children and their heirs.
Careful drafting of the trust’s terms and conditions will help protect funds, etc., from unintended beneficiaries. To give the adult beneficiary additional control, we typically appoint them as family trustee of their own trust. They can invest and use the assets at their discretion, within the limits you have specified and as long as the assets remain in the trust name.
To give the beneficiary increased divorce and creditor protection, we typically appoint an independent, unrelated co-trustee. However, to make sure the beneficiary isn’t saddled with a difficult or unresponsive co-trustee, we often provide the trustee/beneficiary with the right to remove the co-trustee.
[wendy hartman]
wealth adviser, Buckingham Asset Management
To protect a beneficiary’s wealth transfers from creditors, predators and future ex-spouses, work with an estate planning attorney to create a trust to receive assets, versus distributing them outright at future designated ages. Establishing an irrevocable trust with the beneficiary as trustee is a powerful option, since the assets are not in the individual beneficiary’s name. An irrevocable trust provides protection for not only the first-named beneficiary, but also for future generations.
But once income is distributed from a trust to a beneficiary, those assets become unprotected. They’re co-mingled with the beneficiary’s individual assets, making them vulnerable to creditors and future spouses. This is especially true in cases where the income isn’t needed by the beneficiary. You can protect these income distributions by making sure the trust document includes a provision that makes the distributions discretionary, rather than occurring at mandatory intervals, such as quarterly. You also might consider protecting the trust beneficiary from himself by adding a co-trustee for at least a year prior to the date the beneficiary becomes his own trustee. The role of the co-trustee is to educate the beneficiary on the provisions of the trust, and to help avoid unnecessary distributions and co-mingling with individual or marital property.