As Virginia estate planning lawyers, Maryland estate planning lawyers, and DC estate planning lawyers, one of the strategies that we often recommend to our clients is the Beneficiary Asset Protection Trust (also called a Spendthrift Trust or Dynasty Trust or inheritance trust), which we can build into your Revocable Living Trust or your Living Trust Plus Asset Protection Trust, to take effect upon the death of the trust creator. Whether your trust is created in Virginia, Maryland, or DC, a Beneficiary Asset Protection Trust / Spendthrift Trust / Dynasty Trust / Inheritance Trust creates a sub-trust for each beneficiary. Typically, the beneficiary of each sub-trust acts as his or her own trustee and can use the assets in the trust for his or her own health, education, maintenance, and support (the latter two — maintenance and support — encompass almost anything). If you have beneficiaries who you’re afraid will be irresponsible in managing their own sub-trusts (or if a beneficiary is or becomes subject to a lawsuit or judgment or under attack from other potential creditors), then a responsible third party — another family member or a professional trustee — can be named to act as trustee of a sub-trust to manage and disburse the funds in accordance with your desires as the creator of the trust.

Although the Beneficiary Asset Protection Trust may be the best solution for people who want to protect inheritances for their beneficiaries, or who have fiscally irresponsible beneficiaries, there are several ways a Beneficiary Asset Protection Trust can fail or be thwarted:Beneficiary Acting as Trustee Removes the Assets: If the beneficiary is serving as the trustee of his or her own trust, the beneficiary could thwart the protection of the trust by distributing assets out of the trust and into the individual name of the beneficiary. Worse yet, the beneficiary could then commingle those distributed assets to a joint account with a spouse or another individual, thus possibly subjecting those assets to divorce and/or to lawsuits or other creditor attacks against the joint account owner.Trustee’s Actions: If you are not using a professional trustee, such as a qualified trust company or an experienced Virginia trusts and estates attorney or Maryland trusts and estates attorney or DC trusts and estates attorney, as the trustee of the Spendthrift Trust, you should be careful that the person you pick will make the best decisions for your beneficiary. Simply put, trusts may not work well if the trustee doesn’t do a good job. For example, the trust may not work well if your trustee doesn’t use a professional money manager or distributes too much money to your beneficiary or refuses to make appropriate distributions to the beneficiary or commits outright fraud or embezzlement.Exempted Creditors: In some states, certain entities are not considered creditors and can access funds in the trust, even though they might have to go through the courts. For instance, a parent seeking child support or an ex-spouse who is owed alimony may be allowed to bring suit to access the funds in the trust. Some states also allow creditors who provide “necessary” goods and services — such as food, housing, and medical care — to go after funds in the trust. Lastly, the IRS can sometimes go after money in a spendthrift trust. This IRS Memorandum explains that the IRS may levy on certain assets of the trust, despite the existence of spendthrift provisions, if the taxpayer possesses fixed and determinable property rights in the trust. A levy will seize the taxpayer’s fixed right to trust income and the taxpayer’s fixed right to obtain a future distribution from the corpus. Also, if a trustee distributes funds that the trustee knows are encumbered by a federal tax lien, the trustee can be liable for tortious conversion, i.e., intentionally impairing the security of the IRS lien.

Yes. In many states, there is case law supporting the use of Beneficiary Asset Protection Trusts / Spendthrift Trusts. In many states this case law, called common law, has also been codified into a statute, often specifically stating that the beneficiary can also be the trustee of his/her own Beneficiary Asset Protection Sub-Trust. For example:Virginia Law "Virginia Code § 64.2-746 Discretionary trusts; effect of standard" states as follows: E. A creditor may not reach the interest of a beneficiary who is also a trustee or cotrustee, or otherwise compel a distribution, if the trustee's discretion to make distributions for the trustee's own benefit is limited by an ascertainable standard.Maryland Law "14.5-510. Ability of creditor to attach, exercise, reach, or otherwise compel distribution of interest in trust" states: Interests of beneficiaries that are trustees or sole trustee of trusts but not settlors of trust (a) A creditor may not attach, exercise, reach, or otherwise compel distribution of the beneficial interest of a beneficiary that is a trustee or the sole trustee of the trust, but that is not a settlor of the trust, except to the extent that the interest would be subject to the claim of the creditor were the beneficiary not acting as cotrustee or sole trustee of the trust.