How to Protect Property From Creditors and Even Divorce

Announcer: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Mark: Hi, again, it’s Mark Schwartz, your personal family lawyer and your REI Classroom host for this topic. Our topic today is how to protect your real estate from creditors and even divorce.

Announcer: This REI Classroom real estate lesson is sponsored by UglyOpportunites.com.

Mark: I’m an estate planning attorney who specializes in helping real estate investors, and I would say probably the most common thing that clients bring to me when it comes to inheritance is, “How am I going to protect it from creditors, or if my child gets a divorce?” There are some really good ways of doing that, and you can only do it if you leave it to your children in a certain way. It’s almost like a treasure chest.

In my office we call it a Lifetime Asset Protection Trust. Other people call it Dynasty Trust. It’s also referred to as a Spendthrift Trust, sorry, it’s a bit of a tongue twister there. What happens is you leave your real estate, or all of your assets if you choose, to your children in a separate trust. This trust functions almost like an LLC in terms of asset protection and liability.

You can make your child the trustee. If the child or children actually get into trouble, what they often do is resign as the trustee and they appoint an independent trustee. This is the important part. Creditors, including spouses, can only get at what the beneficiary can demand. The beneficiaries in this case are the kids. So if you give the trustee, the manager, the power to only make distributions when that manager wants, then the beneficiary can’t make any demands which means that creditors can’t get at the assets.

Now, let me give you a couple of examples, because these are real life examples. I have a colleague who actually declared bankruptcy, personal bankruptcy. The creditors tried to go after this Lifetime Asset Protection Trust. The colleague, the debtor, said, “Well, listen, that Lifetime Asset Protection Trust isn’t owned by me. It’s owned by a trust and it’s controlled by an independent trustee. Therefore, the creditors can’t get to it.” And the bankruptcy court agreed.

This is not a unique case. Bankruptcy courts routinely will deny creditors access to that trust. Now like I said, this is not something that they can do for themselves. This is only something that you can do for them, as their parents or grandparents. When leaving assets to your kids, don’t leave it just outright. I think the second best option is to leave it to them in stages, but don’t do that because this is something that they can’t give themselves, and you’ve worked hard to create your legacy, so make sure that it’s preserved.

My name is Mark Schwartz. Please don’t wait until you’re dying to see me. Until next time.

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