Asset protection for beneficiaries in bankruptcy does not exist for outright transfers to beneficiaries.

Just reviewed a wonderful article written by one of the primary asset protection gurus in the country as to a recent bankruptcy court case where a beneficiary tried to avoid his inheritance from being subject to the claim of his creditors in bankruptcy. The beneficiary tried to utilize a Spendthrift provision in his deceased mother’s revocable living trust.  While the legal analysis is somewhat mind numbing, the bottom line is fairly easy to understand. If want to protect the inheritance you intend to pass to your loved ones, then you need to strongly consider the use of longer term trusts.  By having the intended beneficiary’s share remain and pass in trust for the beneficiary’s benefit, your beneficiary can benefit from the asset protection benefits of a trust, in or out of bankruptcy, assuming well drafted trust terms. This case showed a failing attempt to get this same benefit by arguing that the outright transfer of the inheritance can be held up with the trust’s spendthrift provision. Sorry, while it may have not been directly stated by this court, it is easy to see how this argument failed. It is called “constructive receipt.” If you have the right to receive something, anything done after that point is normally considered as done by you on your behalf. Understand this and apply it to the rest of the laws involved and the beneficiary was destined to fail in her legal arguments. So, again, the bottom line is that you generally need to do proper  planning on the front end to protect your intended beneficiaries on the back end. Enjoy the rest of your day!

Jay Adkisson’s Forbes’ article can be seen here:

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