After many years of hard work and smart decisions, you have built an estate that you will eventually leave as a nice inheritance for your children. But, you are worried about the stability of one child’s marriage. Will the child lose that inheritance in a future divorce? Or maybe a child has recently lost a job and fallen on hard times. Will the child lose that inheritance to a creditor or a bankruptcy? Or maybe a child is prone to make poor money choices. Will the child lose their inheritance to dumb decision making? But there is nothing you can do – right? When you die, they will get their inheritance. That’s just the way it has to be – right? The answer is a resounding no. You can protect your child’s inheritance from a divorce, from creditors, from dumb decisions, and more.
There are four general stages of a revocable trusts life cycle (three for a single person):
- What do I want to have happen while I/we are alive and able?
- What are the rules if I/we become incapacitated?
- What happens when the first spouse or partner passes away (this level only applies to couples planning together)?
- What happens upon the death of the surviving spouse/partner?
Many people assume that the only thing you can do when you die is give the inheritance outright to your children or other beneficiaries. But, the reality is that most states will allow the assets to continue to be held in Trust for a significant period of time after your death. In the three states I am licensed in, it is unlimited (Idaho), 1000 years (Utah), and 500 years (Arizona) respectively. This means that you can provide asset protection to your children and their descendants for many, many years. This is done through use of inheritance protection trusts.
An inheritance protection trust is an irrevocable trust established through your estate plan. The trust is drafted to continue for the lifetime of a beneficiary or beneficiaries, rather than end at death or a set age of the beneficiary. By receiving the inheritance in trust, rather than outright, the assets are protected from lawsuits against the beneficiary, a divorce, or just plain dumb decisions. If appropriate, a beneficiary can even serve as trustee of his or her inheritance protection trust. However, if you want to protect from dumb decisions, it would be best not to have that individual serve as Trustee of their trust.
In addition to asset protection for the beneficiary, there are other benefits to inheritance protection planning. These benefits may include the ongoing exclusion of assets from the estate tax system during the life of the trust. This allows assets to grow free of future estate taxes when a beneficiary dies. Further, the trust may be drafted to keep family assets in the family, passing them to future generations as opposed to having them pass to others, such as the surviving spouse of a child who could possibly re-marry.
In meeting with your advisors, take the time to explore how your plan can best meet your goals and objectives while addressing your fears and concerns. Don’t settle for cookie cutter, one size fits all plans. Inheritance protection can be a powerful tool to protect your assets from being lost while still providing all the benefits of the inheritance to the beneficiary.