Should You Leave Property Outright to Children?

Should you leave property, assets and investments to children or beneficiaries outright? When asked a question like this, we often tell our clients that we want them to understand what can be done to protect assets, and that leaving assets “in trust” for children or other beneficiaries can provide some incredible protection.

The Kansas Uniform Trust Code provides in its definitions, the following definition for a “Spendthrift provision”:

“Spendthrift provision” means a term of a trust which restrains either voluntary or involuntary transfer of a beneficiary’s interest.

We can provide that when property is to pass to a child, for example, that the property shall continue to be held in trust for the child’s benefit, however, subject to a “Spendthrift provision.”

The Kansas uniform Trust Code provides that “to the extent a beneficiary’s interest is not subject to a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary’s interest by attachment of present or future distributions to or for the benefit of the beneficiary or other means.” This means that if a trust for a child does not have a spendthrift provision, that judgment creditors can attach and recover from assets that are in the trust for the benefit of the child, the same as if the assets were distributed outright to the child.

However, if the trust has a spendthrift provision, and in addition to that, states that a trustee can only distribute income or principal for a recognized standard, such as for the beneficiary’s health, education, maintenance or support (HEMS standard), a creditor of a beneficiary may not compel a distribution of income or principal that is subject to the Trustee’s discretion.

The beneficiary can be a Trustee of his or her own trust share, and if the trust provides that distributions in this event are to be subject to the HEMS standard, a creditor does not have the right to compel distribution or attach the interest that is held in the trust.

Asset protection has become an important part of the discussion we have with clients because in using a plan with the proper language, we can protect life insurance benefits, IRA plan benefits and virtually any other assets or investments from creditors, including a spouse in a divorce, by distributing assets to children in trust rather than outright. Contact our Wichita office at 316-729-0100 to discuss your situation.