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Protect your beneficiaries and their inheritance from creditors, predators and bad decisions

by Tom Alberts | Senior Contributor
December 20, 2019

Assets you intend for your loved ones may be exposed to a variety of external perils that include creditor demands, divorce settlements, liability claims and financial mismanagement. The use of a revocable living trust to control and distribute assets can protect and preserve assets you leave to beneficiaries.

The simplest way to leave an inheritance - as an immediate, outright lump sum to a beneficiary named in your will or trust - may lead to complications long after you're gone.

That's why estate planning experts urge Americans to consider more than just who will receive their assets.

They advise clients also to consider when and how their assets will be distributed.

a disappointed man looking down at his credit card

When you leave assets outright to your beneficiaries without considering their personal circumstances and vulnerabilities, you expose their inheritances to creditors, predators and other financial threats.

"Individuals have worked hard to accumulate their savings, and have often scrimped, saved and denied themselves some luxuries in life, so it's something they do with great effort," says Ohio-based estate planning attorney Steve Gariepy. "They don't want to simply transfer that wealth when they die in a way that beneficiaries might spend it on items the parents or grandparents might have never intended. So, I often find that (estate owners) want the wealth preserved constructively."

What are some threats to an inheritance?

If any of your beneficiaries have certain troublesome traits - a rocky marriage, substance abuse problems, difficulties managing money or employment in a high-liability occupation - their inheritance could be at risk. Here's a look a four key threats.

  1. Financial mismanagement. Young adults without financial experience tend to make poor spending and investing decisions. If your goal is to fund your grandchild's college education, you might think twice about letting an inexperienced teenager manage a significant sum of money. Having the ability to blow through money and lack financial sophistication, however, is not age dependent. If a beneficiary is dealing with issues such as substance abuse or a gambling addiction, an outright inheritance may be wasted and contribute to more problems. Planners suggest you consider the financial sensibilities of all your beneficiaries, regardless of age.
  3. Creditor demands. If your beneficiary is bankrupt or awash in bad debt from student loans, credit cards, mortgages, etc., creditor claims can compromise and consume their inheritance. Creditors can seek to garnish your beneficiary's bank accounts, place liens on their property or impose other forms of recovery that can be in force for several years until debts are satisfied. If your beneficiary has immediate control of their inherited assets, their creditors might seek immediate repayment.
  5. Divorce settlements. Perhaps the last people you want to benefit from your estate are the ex-spouses of your loved ones. If your beneficiary is in a troubled marriage, your may want to ensure estranged in-laws don't benefit from your estate. If funds inherited by one spouse are commingled in a joint bank account, the funds become community property. In the event of a divorce, your gift could wind up in the wrong hands as part of a divorce settlement.
  7. Liability claims. People in certain professions - especially doctors, lawyers, long-haul truck drivers and farmers - face a high risk of personal liability. Even though people in those professions usually have liability insurance, claims involving malpractice, negligence and business failures can surpass coverage limits and put their personal assets at risk. As a result, people in professions with high liability risks often avoid titling assets in their individual names. An outright inheritance to them could force your gift to be used to pay potential legal judgments and settlements.

How can I protect my beneficiaries?

One popular strategy to protect your heirs is to utilize a trust-based plan that gives your successor trustee discretion over the distribution of your assets.

"If you are concerned that your children, grandchildren or other beneficiaries will not have the skills required to manage and invest their inheritance or will lose their inheritance in a lawsuit or divorce, then talk to your estate planning attorney about how to incorporate discretionary trusts into your estate plan," suggests California's John Rogers Burk firm, echoing a common theme expressed by estate planning attorneys.

A discretionary trust lets your successor trustee decide how your property is distributed if you become incapacitated and after your passing. With a trust, the grantor sets the rules and conditions for distribution.

Also, a trust has advantages over a will-based plan or testamentary trust, in part, because its assets avoid the delays and expense of probate administration. Also, a will, unlike a trust, becomes a public record, so avoiding probate will preserve your family's privacy.

A trust can be tailored to each beneficiary's unique set of circumstances with the successor trustee having complete discretion to make distribution decisions and fend off risks like spendthrifts, substance abusers, troubled marriages and vulnerable doctors.

a hand splitting a couple of puzzle pieces

For example, when the trust, not the doctor, holds title to the assets, only his distributions from the trust, not the principal of the trust itself, would be exposed to a malpractice judgment. Or, a trustee's discretion can prevent a wasteful spendthrift or substance abuser from squandering an inheritance. When financial inexperience is a concern, a trustee can control the amount and frequency of distributions to trust beneficiaries. In the case of a young adult, the payout of an inheritance is commonly staggered in five-year intervals - one-third of an inheritance at age 25, another third at age 30 and the final portion at age 35.

Your decision on which estate planning tools are best suited for your situation should be made in consultation with a qualified professional, says Ohio-based estate planning attorney Janet L. Lowder.

"An estate planner must understand the special circumstances of the beneficiaries of an estate to give appropriate advice and set up a plan that will work for those beneficiaries," Lowder explained. "This includes an understanding of relationships between the family members. I like to tell clients that when setting up their estate plan, it is not the time to hide family conflicts or problems that beneficiaries are having. The better I understand the family dynamics, the better I can plan for the family."

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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