How can I protect my children from creditors in my estate planning?
Maryland, as well as most other states, does not permit asset protection if it is a self-settled trust. In other words, I cannot transfer my property into trust and retain the benefit of the trust and then later claim that my creditors do not have access to the assets in that trust. There is no prohibition, however, if I put my assets in a trust and leave that trust to my spouse or to a child because it is not their assets they are my assets and I have no obligation, generally, to be paying my spouse’s (or certainly my children’s) future creditors. There are ways to design trusts which we use very often to protect the inheritance for a child from that child’s creditors. It is even possible to create such a trust and permit the child to be their own trustee of that trust and still keep those assets out of the reach of the child’s creditors. This is because of the fact that it is very difficult to assemble and very easy to lose it. These techniques are very valuable when doing estate planning.
One of the techniques involves a spendthrift clause which is well-established in Maryland and will protect the property from the creditors of the beneficiary. The other technique, which is used in special needs trusts, is to create a discretionary trust which also keeps the assets out of the hands of the creditors. The reason the discretionary trust is more often used for special needs and not in other settings, is because you cannot have the beneficiary the trustee of his or her own discretionary trust and have it immune from that beneficiary’s creditors.
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