Using Trusts in New Jersey to Defeat Claims of Creditors
Keep Your Money from Creditors, Predators and the Son or Daughter in Law You Can’t Stand
A Trust Protects Your Loved Ones Long After You’re Gone
You’ve worked hard all your life. If you’re like me you’ll be damned if someone else is going to steal and/or misspend a lifetime of your savings and income. But if you don’t set up the correct type of estate plan with a trust, that is exactly what can happen.
Take a look at what you have in place upon death. Are assets being distributed to your beneficiaries outright or in trust?
If your estate is to be distributed to a beneficiary outright, the beneficiary can do whatever he or she wants with these funds. So can others. Your estate and your assets are at risk from the beneficiary’s creditors, ex-spouse in a divorce, and poor judgment.
Understanding How a Trust Can and Cannot Defeat a Creditor
Creditors are everywhere. People get into debt and can’t or won’t pay. Some creditors are flexible, others are not. Some debtors are well-meaning but become unintentional debtors, and then there are the low-life dirt-bags who knowingly incur debts and obligations they can’t pay.
So what happens when the debtor I just described is also the creator of a trust (settlor) or a beneficiary of either a revocable or irrevocable trust? Can a creditor pierce the trust to satisfy the debt? Can the debtor hide beyond the reach of the creditor(s) because of the trust? The answer is…it depends, so let me explain my answer.
Trusts and Creditor’s Rights
Whether or not the terms of a trust contain a “creditor protection provision”, the following rules apply:
AS TO THE CREATOR OF A TRUST
- During the lifetime of the settlor (a settlor is the creator of the trust and who funds the trust), the property of a revocable trust is subject to claims of the settlor’s creditors.
- With respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit. If a trust has more than one settlor, the amount the creditor or assignee may reach cannot exceed the settlor’s interest in that portion of the trust attributable to the settlor’s contribution.
- After the death of a settlor, and subject to the settlor’s right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor’s death is subject to claims of the settlor’s creditors, costs of administration of the settlor’s estate, the expenses of the settlor’s funeral and disposal of his/her remains, and to a surviving spouse or partner in a civil union and children to the extent the settlor’s probate estate is inadequate to satisfy those claims, costs, expenses. See N.J.S.A. 3B:31-39.
- No matter if there is a spendthrift provision or not, a revocable trust under the UTC (New Jersey Uniform Trust Code) is subject to the claims of creditors “during the lifetime of the settlor” and “after the death of a settlor, subject to the settlor’s right to direct the source from which liabilities will be paid.” N.J.S.A.§3B:31-39. Not only can creditors go after the trust corpus, but if the probate estate is insufficient, the revocable trust is obligated to cover the “costs of administration of the settlor’s estate, the expenses of the settlor’s funeral and disposal of remains, and to a surviving spouse or partner in a civil union and children.” As I pointed out earlier, a settlor is broadly defined as “a person, including a testator, who creates or contributes property to a trust.” N.J.S.A. §3B:31-3. So, this definition includes a grandparent, even if the trust he or she sets up is for the benefit of a child or grandchild.
AS TO THE BENEFICIARY OF A TRUST
A Beneficiary Can Be Protected From a Creditor
According to the Uniform Trust Code (UTC) (adopted by New Jersey in 2016), the general rule of thumb is that “to the extent a beneficiary’s interest is not protected by a spendthrift provision (see below for an explanation of a spendthrift provision), a creditor or assignee of a beneficiary may reach the beneficiary’s interest by attachment of present or future distributions to or for the benefit of the beneficiary” according to the laws of the State.
The takeaway from this is the importance of a spendthrift clause in a trust. The spendthrift statute in New Jersey is valid “if it restrains both the voluntary and involuntary transfer of a beneficiary’s interest.” N.J.S.A. §3B:31-36. A spendthrift provision is also “valid even though a beneficiary is named as the sole trustee or as a co-trustee of the trust.” With a spendthrift clause creditors of the beneficiary normally cannot “reach the interest or a distribution by the trustee before its receipt by the beneficiary”. Creditors also cannot force “a distribution that is subject to the trustee’s discretion, even if: (1) The discretion is expressed in the form of a standard of distribution i.e. health, maintenance, support, etc.; or (2) The trustee has abused the discretion.” N.J.S.A. 3B:31-38.
Creditors of a beneficiary can execute against a trust distribution when and only when the “distribution of income or principal that the trustee is required to be made to a beneficiary under the terms of the trust, including a distribution upon termination of the trust”. N.J.S.A. 3B:31-40.
With a spendthrift clause a creditor with a claim against the beneficiary, cannot force the distribution of a trust corpus or income to the beneficiary even if the trustee is permitted to make payments directly to the beneficiary. If the creditor has a claim against the trust’s creator (the settlor), and the trust is revocable, then it doesn’t matter what the trustee is doing with the property, it is still subject to the creditor’s claims.
If you are a creditor or debtor and a trust is or can be the primary source of payment you really need to meet with me. I’ll explain the law and evaluate with you the likelihood of protecting or seizing the corpus ($$$) existing within the trust to satisfy debts and other obligations.
It is possible to create trusts that give the Trustee (who may also be a beneficiary) great flexibility in distributing the assets to the beneficiaries, and at the same time protects those assets from a beneficiary’s immaturity, misuse, creditors, divorce, etc. Also, trusts may be used when you want to direct how assets will pass upon the beneficiary’s death. For instance, many times in a second marriage a trust will be established for the benefit of the spouse but provide that upon the spouse’s death the assets will pass back to the decedent’s children. Otherwise, without a trust, your second spouse will be able to completely disinherit your children after you die. I’ve seen this happen countless times.
Come speak to me (Fredrick P. Niemann) about the benefits and drawbacks of using a trust to distribute your assets to your beneficiaries.
It may also be a good idea if you currently have a trust in place to review it to determine if its terms are still appropriate.
Using a Trust to Defeat Creditors and Predators
As I stated many times on this site many people establish trusts for young beneficiaries. You should look at the ages when the assets you own will be distributed outright to your beneficiaries, keeping in mind that assets distributed to somebody who is age 18 years is likely to be spent differently than if distributed to a person who is 30 years or older. It may be appropriate to increase or lower the age(s) at which a beneficiary will receive an outright distribution from your trust.
Alternatively, it may be appropriate to give the beneficiary an income stream or give the Trustee greater discretion to make distributions from the principal as circumstances warrant. For example, a trust might say that a child will receive the income from the trust starting at age 25, and that the principal must be distributed to the child outright at age 30 and 35. Prior to age 35, the trust principal can be used for the beneficiary pursuant to the terms of the trust or at the discretion of the trustees. By structuring a trust this way, the beneficiary has an opportunity to learn how to manage money.
Don’t overlook beneficiaries who have or may in the future have special needs and/or require public benefits
If you have a beneficiary who is elderly (a parent, in-law, great aunt, etc.) or disabled, that beneficiary may need to qualify for public benefits in order to maintain their standard of living. If a person who is receiving public benefits receives an inheritance directly, the public benefits will cease, and the person must exhaust the inheritance to pay for the care that public benefits would otherwise have provided for. Once the inheritance is exhausted, the person must then reapply for benefits. This can be a traumatic and expensive process. Instead, you should consider leaving assets in a purely discretionary Special Needs Trust for the person, drafted in such a way that it does not interfere with the person’s ability to receive public benefits. By using this approach, the trust becomes a security blanket for the beneficiary, not a burden. To learn more about the benefits of a Special Needs Trust, please visit our Special Needs Trust web page.
The use of a properly written New Jersey trust is a very good estate planning tool.
Not sure if your trust will protect your estate from creditors and others? If you have any questions,
Contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at email@example.com. He welcomes your calls and you’ll find him to be easy to talk to and very approachable.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Trust Attorney
Trust attorney serving these New Jersey Counties:
Monmouth County, Ocean County, Essex County, Cape May County, Mercer County, Middlesex County,
Bergen County, Morris County, Burlington County, Union County, Somerset County, Hudson County, Passaic County