Protect Your Kids' Inheritance with a Lifetime Asset Protection Trust
As a parent, you likely want to leave your children an inheritance. Without the proper precautions, the wealth you pass on could be at risk of being lost or squandered by common life events, like divorce, unplanned debt, devastating illness, and unfortunate accidents.
A sudden inheritance windfall can wind up doing your kids more harm than good.
Creating a will or a revocable living trust offers some protection for your kids' inheritance. Most law firms will guide you to distribute assets through your will or trust at specific ages and stages.
There is another option that gives your children access, control, and asset protection for whatever assets they inherit from you. If you’ve created an estate plan, check to see how your will or trust leaves assets to your children.
In our planning process, we offer parents the option of creating a Lifetime Asset Protection Trust for their children’s inheritance. These unique trusts safeguard your kids’ inheritance from being lost to common life events.
But that’s not all they do.
The best part of these trusts is that they offer your kids the best of both worlds: 1) asset protection and 2) the ability to use and control their inheritance. You can even provide your heirs with the educational opportunity to gain valuable experience managing and growing their inheritance.
Not Only for The Super Rich
Lifetime Asset Protection Trusts are not just for those with massive wealth. These trusts are even more useful if you’re leaving a relatively modest inheritance because they can be used to educate your children about how to grow your family wealth, instead of quickly blowing through it.
All of us are vulnerable to poor investment choices if we never have good guidance. When someone gets an unexpected windfall inheritance, they can be more vulnerable to poor choice. One study found that, on average, an inheritance is totally gone in about five years due to debt and poor investment. Another study found that one-third of people who receive an inheritance actually had a negative savings within just two years.
Not to mention, the smaller the inheritance, the more at risk it is of getting wiped out by a single event like a medical emergency, lawsuit, or serious accident. True story:
(The individual’s name has been changed for privacy protection.)
The Flooded Penthouse
Eric was staying at a friend’s penthouse apartment in New York City. Eric decided to run himself a bath, but he got distracted when another friend called and invited him out to dinner.
At about 2 a.m., Eric came back to the apartment only to discover he made a huge mistake – he left the bath running that entire time. The resulting flood caused more than $400,000 in damage to that apartment and the one below it.
While there was insurance to cover the damage, the insurance company sued Eric to cover its loss (this is known as “subrogation”). Because the flood was due to Eric's negligence in leaving the bath running—a simple, but costly mistake—Eric was responsible for the damage. This is where the inheritance piece comes into play and why it’s so important to leave whatever you’re passing on to your heirs in a protected trust. If Eric had received an inheritance outright in his own name, he would have lost $400,000 of it to this unfortunate mishap.
If Eric had received his inheritance in a Lifetime Asset Protection Trust instead, his money would be completely protected from such a lawsuit—and just so many other unimaginable threats.
Don’t Take Any Chances It does not matter how much financial wealth you have. If you plan to leave your kids anything at all, you should do everything you can to give what’s left behind the chance to grow and prevent it from being lost because of a mistake or poor choice. This way, your resources can have a truly beneficial effect on the lives of future generations.
A Lifetime Asset Protection Trust can achieve each of these goals and so much more.
Not All Trusts Are Created Equal
When it comes to leaving an inheritance, placing your money in a revocable living trust is the right thing to do. However, some lawyers advise you distribute the trust assets outright to your loved ones at specific ages, such as one-third at 25, half of the balance at 35, and the rest at 40. Check your own trust now to see if it does this or something similar.
An outright distribution can be a wonderful gift and may be the right thing to do. But you need to make that decision with full understanding of what else is available.
A living trust can protect your loved ones’ inheritance as long as the assets are held by the trust. Once the assets are disbursed to the beneficiary, they can be lost to future creditors, a catastrophic accident or illness, divorce, bankruptcy—or as in Eric’s case, a major lawsuit.
Rather than risking their inheritance by leaving it outright to your children through the terms of your will, you can gift your assets through a Lifetime Asset Protection Trust. This makes so that the Trustee of the trust to own the assets, not your children.
If your kids ever get in a lawsuit or any other expensive life event, they can’t lose their inheritance because they never owned it in the first place. A Lifetime Asset Protection Trust can be built into a revocable living trust, which becomes irrevocable at the time of your death and holds your loved one’s inheritance in a continued protective trust for their lifetime.
Here’s how it works: A Trustee of your choice holds the trust assets upon your death for the benefit of your child or children. Because a Lifetime Asset Protection Trust is discretionary, the Trustee has the power to distribute the assets at their own discretion, instead of being required to release them in a rigid structure. This discretionary power enables the Trustee to control when and how your kids can access their inheritance, so they’re not only protected from outside threats like ex-spouses and creditors, but from their own poor judgment as well.
A Lifetime of Guidance & Support
Because distributions from a Lifetime Asset Protection Trust are 100% up to the Trustee, you may be concerned about the Trustee’s ability to know when to make distributions to your child and when to withhold them. Granting such power is vital for asset protection, but it also puts a lot of pressure on the Trustee. You probably don’t want your named Trustee making these decisions in a vacuum.
You can write up guidelines to the Trustee, providing the Trustee with direction about how you’d like the trust assets to be used for your beneficiaries. This ensures the Trustee is aware of your values and wishes when making distributions, rather than simply guessing what you would’ve wanted.
Many of our clients add guidelines describing how they’d choose to make distributions in up to 10 different scenarios. These scenarios might involve the purchase of a home, a wedding, the start of a business, and/or travel. Some clients choose to provide guidelines around how they would make investment decisions, as well. This is something we can support you with if you decide to use a Lifetime Asset Protection Trust.
An Educational Opportunity
Beyond these benefits, a Lifetime Asset Protection Trust can also be set up to give your child hands-on experience managing financial matters, like investing, running a business, and charitable giving. He or she will learn how to do these things with support from the Trustee you’ve chosen to guide them.
This is accomplished by adding provisions to the trust that allow your child to become a Co-Trustee at a predetermined age. Serving alongside the original Trustee, your child will have the opportunity to invest and manage the trust assets under the supervision and guidance of a trusted mentor.
You can even allow your child to become Sole Trustee later in life, once he or she has gained enough experience and is ready to take full control. As Sole Trustee, your child would be able to resign and replace themselves with an independent trustee, if necessary, for continued asset protection.
Regardless of whether your child becomes Co-Trustee or Sole Trustee, a Lifetime Asset Protection Trust gives you the opportunity to turn your child’s inheritance into a valuable teaching tool. Do you want to give your child the ability to leave trust assets to a surviving spouse or a charity upon their death? Or would you prefer that the assets are only distributed to his or her biological or adopted children? You might even want your child to create their own Lifetime Asset Protection Trust for their heirs.
We offer you a wide variety of options that can be tailored to fit your values and family dynamics.
Find Out If a Lifetime Asset Protection Trust Is Right For Your Family
Lifetime Asset Protection Trusts aren’t for everyone. If your kids are going to spend the vast majority of their inheritance on everyday expenses and consumables, they probably don’t make much sense. If you want the assets you are leaving behind to be invested and grown over the long term, even through their own business or investments, a Lifetime Asset Protection Trust is immensely valuable.
We will work with you to look at your family circumstances and assets to decide together if a Lifetime Asset Protection Trust is the right option. It’s not about how much you’re leaving your heirs. It’s about ensuring that it is there when needed most and put to the best use possible.
This article is a service of Jennifer Winegardner of Rayboun Winegardner, PLLC. We do not just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love. That's why we offer a Family Wealth Planning Session,™ during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session.