Protect Your Children’s Inheritance With A Lifetime Asset Protection Trust

A lifetime asset protection trust holds a child’s inheritance in trust for the child’s life instead of handing it over outright. With spendthrift and discretionary terms, it can keep the inheritance away from many of the child’s creditors and separate from the marital estate if the child divorces.

The protection is real but not unlimited. Here is how these trusts work under Colorado law and where the limits are.

How a Lifetime Trust Works

You create the trust in your estate plan, and at your death the child’s share goes into the trust rather than to the child. A trustee manages it and makes distributions for the child under the terms you set.

The difference between a will and a trust affects where these terms belong in your plan.

Many parents name the child as a co-trustee or give the child a say in investments while an independent trustee controls distributions. That balance gives the child access while preserving the protection.

Spendthrift Protection

A spendthrift provision is valid in Colorado only if it restrains both voluntary and involuntary transfer of the beneficiary’s interest.¹ When it does, the beneficiary cannot transfer the interest, and a creditor generally cannot reach it or a distribution before the beneficiary receives it.²

There is an important exception. A spendthrift provision cannot be enforced against the beneficiary’s child who is owed support under a child support order.³

Discretionary Distributions

When distributions are left to the trustee’s discretion, a creditor of the beneficiary generally cannot compel a distribution. Colorado allows the court to order a distribution to satisfy a child support order.⁴

How much protection a trust provides depends on how the trustee, distribution, and spendthrift terms are written. Johnson Law Group offers a no-pressure consultation to review your goals, so schedule a consultation before you finalize your plan.

Protection if Your Child Divorces

An inheritance received by gift or bequest is generally separate property in a Colorado divorce. The increase in value of separate property during the marriage can be marital, however.⁵

How the trust is written matters. A beneficiary’s discretionary interest has generally been treated as an expectancy rather than property, while a vested remainder interest in an irrevocable trust can be property.⁶ How trusts are divided in a divorce turns on these distinctions.

Distributions mixed into joint accounts can be harder to trace as separate property. Advising your child to keep distributions separate helps preserve the protection.

Choosing the Trustee and Terms

• Trustee: An independent trustee strengthens protection; a family trustee may be more flexible.
• Distribution standard: Discretionary terms generally give more protection than mandatory payments, because a creditor cannot compel a discretionary distribution.
• Remainder: Decide who receives what is left when the child dies, such as grandchildren.

Talk With a Colorado Estate Planning Attorney

A lifetime trust can protect an inheritance for decades, but only if the terms are written for that purpose. Johnson Law Group is here to help.

The attorneys at Johnson Law Group help parents design trusts that protect a child’s inheritance and will give you a clear read on your options. Schedule a free consultation through our Colorado offices, and we will serve as your North Star from here.

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