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A Better Partnership


Nov 2014
November 01, 2014

Estate Planning Tip: Discretionary Trusts - The Most Powerful Tool for Protecting Beneficiaries from Creditors and Unfortunate Circumstances

It is not unusual in my practice for a client to die and then have the inheritance they planned to leave to a child lost or significantly reduced because the child was disabled at the time or was going through bankruptcy or marital problems.  The most powerful tool that clients have to protect against these types of situations is to give their successor trustee the discretion to hold a beneficiary’s share in a discretionary trust if any of the above listed conditions (and perhaps others) exist at the time of the client’s death.  A discretionary trust provides maximum protection against creditors under Michigan law, including against so-called “super creditors” such as alimony or child support creditors and the government of the State of Michigan or the United States.  Creditors cannot require the trustee to turn such assets over, even in satisfaction of a judgment received in court.  However, the trustee can use the assets on the beneficiary’s behalf without ever making a distribution directly to the beneficiary.  Moreover, the assets of such a trust are not considered countable when determining eligibility for Medicaid or other support programs because the beneficiary is not entitled to any automatic distributions or even to demand a distribution from the trustee for support.
Of course, such discretion could be abused by an overzealous trustee.  Therefore, it’s important to choose your trustees carefully and examine their relationships with the beneficiaries, especially when choosing a family member as trustee. 
If a client knows that a beneficiary is likely to have such problems, it may not wish to leave the creation of a discretionary trust up to the discretion of the trustee.  The creation of a discretionary asset protection trust to hold a beneficiary’s share can be made mandatory under the terms of the trust. 

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