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Does mom’s trust protect inheritance from creditors?

Dear Mr. Premack: My mother created a living trust and transferred her ranch into the trust. She died recently, and the trust says that the ranch is supposed to be divided between my sister and me. She actually had a survey done and gave us each our own relatively identical parcels. I thought that if I could leave my part in the living trust it might give me some protection from possible liabilities. I worry because my own children are teenagers and have their driver’s licenses, and if there is an accident there could be a court judgment that takes my part of the ranch. Can I leave the land in the trust? If not, what other options do I have to protect the ranch from liabilities? – F.H.

Living trusts are very flexible planning tools, and they can be designed to accomplish a wide variety of goals. I would have to review the terms of the trust set up by your mother to be certain what it allows and requires. But from your letter – where you say that the land is supposed to be divided, and your mother even surveyed which parts goes to each of you – I would surmise that the trust was designed to distribute the land outright to you, then to be terminated.

If that is the case, then you’ll own your share free from trust. Her trust will have no further impact on the land or your use and enjoyment of the land. As such, her trust will not be able to provide any protection of the land from your creditors or from judgments that may be entered against you.

She could have designed the trust to require that the land, while separated into shares, continue to be owned by her trust. Your share would be set aside for your benefit and your sister’s share would be set aside for her benefit but neither of you would actually own your shares. The trust could place restrictions on you – for instance, only the trustee would have a right to sell the land, not you. And the trust would be irrevocable and non-amendable due to the fact that its creator (your mother) had died.

If she had placed those restrictions and had included a “spendthrift provision” in the trust, then the land would be exempt from any judgment against you. Why? Because you do not own the land, and the owner (your mother via the trust) did not allow the assets she set aside for your benefit to be drawn away for the benefit of your creditors.

A spendthrift provision would have been easy for your mother’s attorney to create. The trust would need to recite that it was a “spendthrift trust” as allowed in section 112.035 of the Texas Property Code. It could further state that the beneficiary’s interest in the income or the principal of the trust may not be transferred by the trustee to anyone except to the beneficiary, and then only under certain circumstances. With the ranch, it could have stated that it would be held in trust until you die, and then be transferred to your heirs. If so, the land would be protected from creditor claims and judgments for your entire lifetime.

If your mother did not place those restrictions in the trust, but instead instructed that the ranch should be distributed to you outright after her death, then you do not have any of those protections from creditors. Instead, you may be able to rely on another provision in the Property Code: rural homestead protection.

The ranch could be considered to be your rural homestead if you live there and the county appraisal district has approved it as your homestead. If your part of the ranch exceeds 200 acres (for a married couple) you can designate exactly which acres (and the structures on those acres) are to be treated as your homestead. That designation must be written, signed by you before a notary, and recorded with the county clerk. Once on record, those acres are exempt from seizure for the claims of creditors (with standard exceptions like a mortgage you voluntarily place against the land or a tax lien).

Now that you own the land, you should consider placing it into a new trust which you create. The new trust will not provide you with creditor protection, but if you include the provisions which your mother omitted, it can provide creditor protection to your children (and maybe even your grandchildren) when they eventually inherit the land from you. Talk to an attorney specialist like a certified elder law attorney to decide whether a trust is right for you and what terms would best protect your family and ranch.

Paul Premack is a Certified Elder Law Attorney practicing estate planning for all ages and probate law in San Antonio.

Original Publication: San Antonio Express News, June 4, 2012


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