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Can your beneficiary’s creditors seek compensation from your trust?

When you started planning for the future, one of the first things you did was set up a trust for your child. You wanted to make sure that they’d have money to support themselves and invest in the future, so you set aside some each month for several years. Then, you put together an irrevocable trust with the assets you wanted to pass on.

Irrevocable trusts are special because they cannot be amended or revoked once you create them. You no longer have ownership over the assets held by the trust, because they are intended for someone else. Until the terms of the trust are met, the assets are held by a third party where they stay safe against your own creditors.

What about your beneficiary’s creditors, though?

You can protect the trust against the beneficiary’s creditors

Helpfully, you can protect the trust against the beneficiary’s creditors with the right kinds of provisions. Remember, the trustee is only allowed to distribute the trust in line with the terms of the document. Creditors can’t make the trustee pay money or deliver property to them for money due from the beneficiary.

Once the assets are distributed, your beneficiary could be in another situation completely, but until then, the assets in the trust cannot be touched. You may also set up the trust to pay out in a way that minimizes what creditors could collect from the beneficiary once they receive assets. For instance, you might have it pay only a small sum of money out each month, so creditors cannot access much, if anything, from the trust.

Usually, the protections trusts have prevent issues with creditors. Sometimes, beneficiaries do run into collections issues, but they have other options they may be able to use to resolve those problems before accepting assets from the trust. For example, your beneficiary may be able to use bankruptcy to resolve debts and then, when it’s time, accept the assets from the trust. This is a complex situation that they would need some education in before deciding what to do.

Overall, a trust is a good way to protect your assets and the assets you want your beneficiary to receive. An irrevocable trust is highly protective against collections.

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