More bad news for spendthrift trusts

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“Everyone has a plan until they are punched in the mouth.”

I love that quote from Mike Tyson.

Another great quote I just read on the internet was that asset protection trusts and bankruptcy don’t mix.  As soon as I read that quote Mr. Tyson’s quote immediately came to mind.  Why?  Well its pretty simple.  If you set up a trust for asset protection, you are going to want it to be able to withstand the toughest financial attack, which is probably bankruptcy.  After all, why spend the money to set something up if it isn’t going to protect you?  It makes no sense.  Why set up a plan that is going to dissolve when you need it the most?

A couple of weeks ago I talked about one spendthrift trust plan that failed in bankruptcy.  A couple of days ago the 9th Circuit court came out and said they weren’t sure about how much protection a spendthrift trust actually provides in California.  As part of its musings, the court speculated the creditors could potentially take everything inside a spendthrift trust.

This is very important as the only federal court higher than the 9th Circuit is the US Supreme Court.  Put differently 9th circuit opinions are pretty much the law of the land.  Thus if the 9th Circuit makes a determination you better be aware of, and follow it.

If you are serious about having asset protection for you and your family make sure your trust has a lot more protection than a spendthrift clause.  The IRS can ignore them and it appears other creditors may be able to as well.