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       Take a look at the beneficiary distribution provisions of your Trust. If they conclude with the terminology, "outright and free of Trust," there is no asset protection for your beneficiaries, usually your children.

       Let's look at an example. Joyce and Joe have a Living Trust for the family designating their three children, Jim, Jane, and Jake as the Trust beneficiaries. Jim is a lawsuit target in his business, Jane is in a shaky second marriage and Jake is pretty stable in his livelihood except for some credit card issues. Each child stands to inherit about $300,000 to $500,000 from the Trust estate. Joyce and Joe have provided that after their deaths, the Trust estate is to be distributed in three equal shares to their children, "outright and free of Trust". So what happens if at the time of distribution, Jim is being sued and Jane is going through another divorce? What if life has changed for Jake and he has significant creditor issues? Each child's inheritance could be in jeopardy because there are no limitations or restrictions on the distribution of the inheritance.

       Parents as Trustors of the Trust should amend their Trusts to include Protective Inheritance Trust (PIT) provisions. These provisions create a conditional distribution of each child's inheritance. If a child or beneficiary of the Trust is involved in any type of legal proceeding or creditor claim, which could impact his/her inheritance, such beneficiary fails the condition for distribution of their individual share. In other words, in order to receive the proportional share of their inheritance, the child or beneficiary must be free of legal proceedings or creditor claims. If the condition is not met, their respective share remains in the Trust under the investment control of the Trustee.

       As a further condition of inheritance, the Trustors may provide that a child or beneficiary must arrange their own sole and separate property Trust to ensure it is designated as such so as not to consider it co-mingled with a spousal account or Trust. In California, any assets received by gift or inheritance is considered separate property of the recipient. However, if such inheritance or gift is deposited into or co-mingled with a marital or spousal account, it can be presumed to be a gift to the community property account. Any subsequent divorce of the child or lawsuit against the child's spouse could cause the loss of the inheritance due to community property issues and presumptions.

       Since incorporating these personally drafted provisions into my Trust documents, there have been no reports of a loss of inheritance due to legal proceedings by beneficiaries and heirs of deceased clients.

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