04 Apr My son’s ex wants his inheritance. How can I protect it?

Q. What’s the best way to leave money, a house and car to my son, who has a large money judgment against him? I have a trust set up but I’m not sure it will protect him. His ex has the judgment against him and she is a very vindictive attorney, just waiting for me to die. I thought about trying to give her funds to erase the judgment, but she won’t consider it.
— Worried parent

A.  We’re sorry to hear about this difficult situation.

A trust is generally the best way to protect against the creditors of a beneficiary.

But it needs to contain the proper language, said Tom Szieber, a trusts and estates attorney at Chiesa Shahinian & Giantomasi in West Orange.

He said N.J.S.A. Sec. 3B:31-35 provides that a creditor can reach a trust beneficiary’s interest in the trust “by attachment of present or future distributions to or for the benefit of the beneficiary,” unless the interest is protected by a “spendthrift provision” and subject to other parameters set forth in New Jersey statutes regarding wage execution.

A spendthrift provision generally prohibits the transfer of the beneficiary’s interest and prevents it from being reached by a creditor, Szieber said.

“Such provisions are enforceable in New Jersey, provided the provision restrains both voluntary and involuntary transfers of the beneficiary’s interest,” he said. “Furthermore, creditors cannot force the distribution of trust assets and as a result, cannot reach the assets as long as they remain in the trust.”

Former spouses are not “exception creditors” under New Jersey law, Szieber said.

But, he said, it might be prudent for a trust to contain a discretionary distribution provision, where any distributions are at the absolute discretion of the trustee, rather than the common “HEMS” (health, education, maintenance and support) standard, to reduce the risk that a court might permit the piercing of the trust and force a distribution from the trust to satisfy a claim of a creditor.

There could be some administrative headaches along the way, Szieber said.

“Before putting a house in trust, one should ensure that the title insurance and homeowner’s insurance carriers will not object; even if the carrier obliges, premium payments may increase when a property is held in trust,” he said.

He recommends you consult with an experienced trusts and estates attorney who can look at your trust and see if it gives the protections you’re looking for.

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This story was originally published on April 4, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.