When you become a parent, your children become a large part of your world and it makes sense that you would want to proved for them, even after you are gone. However, without taking the proper precautions the wealth you set aside for them to inherit is at serious risk of being accidentally lost or squandered due to common life events, such as divorce, serious debt, devastating illness, and unfortunate accidents. In some cases, a sudden windfall can even wind up doing your kids more harm than good.
As your Personal Family Lawyer firm®, in our planning process we always offer parents the option of creating a Lifetime Asset Protection Trust for their children’s inheritance. These unique trusts are able to safeguard your kids’ inheritance, and the best part of these trusts is that they offer your kids the best of both worlds: an airtight asset protection and the ability to use and control their inheritance. You can even provide your heirs with a unique educational opportunity in which they gain valuable experience managing and growing their inheritance.
Not Only For The Super Rich
Contrary to what you might think, Lifetime Asset Protection Trusts are not just for those with massive wealth. In fact, 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. Without such guidance, most people blow through their inheritance very quickly. In fact, 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 unfortunate event.
Not All Trusts Are Created Equal
When it comes to leaving an inheritance, most lawyers will advise you to place the money in a revocable living trust, which is a great move. However, most lawyers would have 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.
The problem with giving outright ownership of the trust assets in this way is that it puts everything you’ve worked so hard to leave behind at risk. While a living trust may 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 a major lawsuit.
Rather than risking their inheritance by leaving it outright to your children at certain ages or following certain life events, such as graduating college, you can gift your assets to your children at the time of your death using a Lifetime Asset Protection Trust. Therefore, if your kids ever get divorced, file bankruptcy, have a major medical issue, or are ordered to pay damages in a lawsuit, they can’t lose their inheritance. 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 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
Given that 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.
To address this issue, 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 which often leads to problems down the road.
In fact, 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, and they 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 tutelage of a trusted mentor.
You can even allow your child to become Sole Trustee later in life, once they have gained enough experience and are 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 or not 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 their 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 particular values and family dynamics. Be sure to ask us which options might be best for your particular situation.
Find Out If A Lifetime Asset Protection Trust Is Right For Your Family
Of course, 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, a Lifetime Asset Protection Trust probably don’t make much sense. However, if you want the assets you are leaving behind to be invested and grown over the long term, even though their own business or investments, such a Trust can be immensely valuable.
When you meet with us, your Personal Family Lawyer®, we will work with you to look at your family circumstances and your assets to decide together if a Lifetime Asset Protection Trust is the right option for your loved ones. In the end, it’s not about how much you’re leaving your heirs that matters. It’s about ensuring that what you do pass on is there when it’s needed most and put to the best use possible. Schedule a Family Wealth Planning Session today to learn more.
This article is a service of Levi Alexander, Personal Family Lawyer®. 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 and mention this article to find out how to get this $750 session at no charge.
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