An irrevocable trust is an option to help you safeguard your assets and prevent creditors from reaching them. The trust is a financial planning tool that also serves to add long-term financial security for you and your family. Because an irrevocable trust, once put into effect, cannot be amended or revoked, you have no ownership interests in the trust property. Thus, the assets are unreachable by your creditors. Depending on the specific provisions in the irrevocable trust, you can protect the trust property from potential creditors of the beneficiaries'.
An irrevocable trust can be drafted with provisions that serve to shield it against the beneficiary’s creditors. The trustee can only distribute the property according to the terms of the trust document. Unless the trustee is authorized under the trust document to pay the beneficiary any sum of money or make payments to third parties on behalf of the beneficiary, creditors cannot force the trustee to deliver any property that belongs to the trust.
When you create a trust, you're known as the grantor, who decides to title property in the name of the trust. You control how the distributions will be paid to the beneficiaries, and if drafted properly, creditors of the beneficiaries' cannot seize the trust property. However, after distributions are made to the beneficiaries, the assets are no longer protected from creditors under the provisions of the trust.
In addition to protecting trust assets from the beneficiaries' creditors, spendthrift provisions can also prevent beneficiaries from using the property for imprudent financial decisions. This clause is created to place restrictions on who can access the property and in what manner. For instance, if you’re including a spendthrift provision in the irrevocable trust for the future benefit of a child, this clause can be tailored to disallow the child from accessing the funds for reckless spending or assigning his rights to the trust property to a third party. Creditors can neither reach the principal or any interest income earned by the trust. The provision will directly include language preventing the beneficiaries' creditors from reaching the trust property and preventing the beneficiary from using the property for specific purposes, often until the beneficiary reaches a certain age.
Sprinkling provisions in irrevocable trusts give the trustee the right to determine how distributions will be made to the beneficiary. A sprinkling trust provision is also called a discretionary provision, allowing the trustee to use his discretion to decide on how to allocate the assets to the beneficiaries. If the trustee believes that a specific distribution to a beneficiary will lead to the beneficiary’s creditors asserting rights to the property, the trustee can decide to hold the funds in the trust or make payments on behalf of the beneficiary. These types of provisions are important, if at some future date, the beneficiary has a creditor that has been granted the right through other means, such as court judgments, to have control over the beneficiary’s assets. A spendthrift provision and a sprinkling trust provision can both be included in the trust document.
Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.