By Lori A. Curtis

When I talk to people about estate planning and avoiding probate, one of the most common things I hear is: “I don’t need a trust.  The only thing I own is my house and I’m leaving that to my children with a beneficiary deed.”

A beneficiary deed can be a valuable estate planning tool.  Much like a bank account, you can file a deed that transfers real property only upon your death.  And, it does avoid probate.

However, a recent decision by Judge Curley in bankruptcy court illustrates that sometimes, you may not want to leave your house to your child without the benefit of a trust.

In the court case In re Jones,[1] the debtor had filed bankruptcy.  Three days after he filed for bankruptcy, his grandmother died.  She had executed a beneficiary deed leaving her real property to her grandson when she died.  The property passed to him outside of probate, but the bankruptcy court determined that the property then became an asset of his estate, which allowed the bankruptcy trustee to sell the property to pay off the debtor’s creditors.

The court did not decide whether or not the property would have been protected if the debtor’s grandmother had left the property to him in trust, instead.  If the trust had simply said, “When I die, my grandson gets everything,” then probably not.  However, you can include language in a trust that allows you to protect your assets from your children’s creditors when you die.

Spendthrift Trust.  A “spendthrift” provision in a trust can provide valuable asset protection from your children’s creditors.  This provision restricts the beneficiary’s access to assets in the trust.  Because he cannot access the trust assets, neither can his creditors.  Your trustee is granted the discretion to hold the assets in trust or make payments to the beneficiary.  Only if your trustee makes payments to the beneficiary can the beneficiary’s creditors access the funds or other assets being paid out.

There are certain exceptions to the general rule, however leaving property to your children or other beneficiaries through the use of a trust can be a valuable asset protection tool you should discuss with an attorney.  Yes, the cost of preparing a trust is more than the cost of having a beneficiary deed drafted for you, but you avoid having your children’s creditors seizing your property after you die.  Call us today to find out if a trust is right for you.

[1] 2012 WL 6212834 (Bkrtcy.D.Ariz.).