Protecting Your Heirs from Creditors

By Lynn Gifford Bria, Esq.
Principal Wealth Advisor and Senior Fiduciary Officer
Washington Trust Wealth Management

When you’ve spent a lifetime building your financial legacy, the last thing you want is for your heirs’ inheritance to disappear into the hands of creditors. The reality is that your children or grandchildren may face financial, professional, or personal challenges that make their inheritance vulnerable. By structuring your legacy properly, you can protect assets while still meeting the needs of your loved ones.

Understanding the Risk of Creditors

Even the most responsible heirs can encounter creditors. A divorced spouse may try to claim part of their inheritance in a settlement. A professional facing malpractice claims might see creditors attempt to seize assets. Financial institutions can levy judgments for unpaid loans or credit card debt. While certain inheritances may not be considered assets for liability—such as property titled in trust or excluded marital assets—the exposure remains significant if wealth is left outright.

Using Trusts to Protect Your Legacy from Creditors

What is a Testamentary Trust?

A testamentary trust, which can be incorporated into a will or living trust, is a legal framework that instructs someone else (the trustee) to distribute your assets on to your heirs in the way you direct. You choose a trustee to hold your assets “in further trust” for your heirs, rather than distributing them outright. The distributions your trustee makes after your death work differently depending on the type of trust you choose.

What is a Discretionary Trust?

A discretionary trust gives your trustee the authority to decide when and how to distribute assets to your named beneficiaries. The trustee has a fiduciary duty and must act in the beneficiaries’ best interests. The beneficiaries cannot request or demand the distribution of assets from the trust, which insulates the trust assets from the reach of creditors. A creditor can only lay claim to funds that have been distributed and are owned individually by the beneficiary. Your named trustee can use your discretionary trust to pay for beneficiaries’ living expenses, like food or rent, instead of distributing a lump sum. For example, if a beneficiary has a legal judgment levied (by a credit card company, former spouse, or other creditor), the trustee can continue paying for items the beneficiary needs rather than paying the individual’s debt.

Why Fund a Testamentary Discretionary Trust?

When assets are transferred during your lifetime (or individually by a beneficiary after your death), a creditor may recover a judgment for the value of the asset transferred during a statutory “lookback period,” often five years. A testamentary discretionary trust does not vest individually in your beneficiary but rather remains protected for his or her benefit.  The lookback period is not applicable. 

Securing Your Legacy

Protecting your heirs from creditors is more than just shielding assets; it’s about ensuring stability, security, and opportunity for generations to come. With proper planning, you can build not just a financial legacy, but a lasting foundation of protection and care for the people you love most.

Washington Trust Wealth Management is Here to Help

Your legacy is too important to leave to chance. Your Washington Trust wealth advisor can work with you and an experienced estate planning attorney to explore strategies, like testamentary discretionary trusts, that safeguard your wealth and protect your family. Don’t wait until it’s too late. Start planning today and give your heirs the greatest gift of all: lasting security.