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Can a trust shield my assets from creditors?

Estate planning serves many purposes, one of the most vital of which is to protect your assets from creditors’ claims. Estate planning aimed at shielding assets from creditors is often referred to as asset protection. Asset protection sometimes takes on a negative connotation and conjures up illegal techniques to dodge creditors, but in actuality, there are many completely legal methods to preserve your assets from potential seizure by illegitimate creditors or the potential future creditors of your heirs.

Spendthrift Trusts

Often, a main concern of parents in passing down their hard earned assets to the next generation is that their assets could be seized by creditors of their children. We can control our own spending habits, but we cannot control the spending or actions of our adult children. To shield your assets from creditors, you may wish to consider placing assets within a trust that contains a spendthrift provision.

A spendthrift trust prevents your heirs from being able to spend the balance of the trust. The trust will distribute only a defined sum per year to the named beneficiaries. Beneficiaries are not able to use the trust as collateral, and creditors cannot touch undistributed assets within the trust. Spendthrift trusts must include a specific spendthrift provision.

Family Limited Partnerships

A family limited partnership can provide effective asset protection for those who wish to preserve their assets while still retaining control of the assets. A family limited partnership allows for general partners, who manage the assets and make investment decisions, and limited partners, who share in the income but do not have control over the partnership’s activities. This arrangement is generally used by parents who want to control investments while still allowing children to receive income.

Family limited partnerships can provide some protection from creditors, but limitations to these entities vary by state. Assets cannot generally be transferred to a family limited partnership, or any entity really, once a creditor has already filed suit to receive payment. This can be seen as fraudulent. However, partnerships formed well in advance of creditor actions can shield assets within the partnership from claims against limited partners.

Contact an estate planning attorney to discuss the various estate planning methods that may lawfully protect your assets from creditors.