Safeguard Your Children’s Inheritance With a Lifetime Asset Protection Trust
Last week, we discussed the benefits of a unique estate planning vehicle known as a Lifetime Asset Protection Trust (LAPT). We referenced this planning tool in the context of how it could have protected Clare Bronfman, the heiress to the multi-billion-dollar Seagram’s fortune, who was manipulated into blowing much of her $200 million inheritance by financing the cult-like group known as Nxivm.
We understand that Clare’s case is quite extreme, both in the amount of her inheritance and the manner in which her wealth was wiped out. A LAPT would have almost undoubtedly protected her and her family’s fortune, but it could also protect families with far less wealth than Clare’s and offer a safeguard against far les outlandish threats.
LAPTs are much more likely to protect from more common trials such as divorce, serious debt, devastating illness, and unfortunate accidents while also providing your heirs with a unique educational opportunity in which they gain valuable experience managing and growing their inheritance, all within airtight asset protection.
To demonstrate how LAPTs can provide protection to families of all asset profiles, here we’ll describe another true story involving a much more relatable life scenario. While the following events are entirely true, the individual’s name has been changed for privacy protection.
The flooded penthouse
Eric was staying at a friend’s apartment in New York City. The apartment was the penthouse of the building, and Eric decided to run himself a bath. While the bath was running, another friend called and invited Eric to go out with him, which he did.
At about 2 a.m., Eric came back to the apartment and discovered he made a huge mistake and left the bath running when he left the apartment. The resulting flood caused more than $400,000 in damage to the apartment and the one below it.
While there was insurance to cover the damage, the insurance company sued Eric for what’s known as “subrogation,” meaning the company sought to collect the $400,000 they paid out to repair the damage Eric caused to the property.
Because the flood was due to his negligence in leaving the bath running—a simple, but costly mistake—Eric was responsible for the damage. Now here’s 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.
However, if Eric had received an inheritance in an LAPT, instead of an outright distribution, his inheritance would be completely protected from such a lawsuit—and just about any other threat imaginable.
Safeguarding your children’s inheritance
If you are like most parents, you are planning on leaving your children an inheritance upon your death. However, if you handle this incorrectly, the wealth you pass on could be at serious risk of being accidently lost, squandered, or even doing more harm than good like in Clare’s case.
You can create a will or a revocable living trust to try safeguard their inheritance. However, most of the time you’ll be guided to distribute assets through your will or trust to your children at specific ages and stages, such as one-third at age 25, half the balance at 30, and the rest at 35. While this method does grant a little protection, another option that can give your children access, control, and airtight asset protection for whatever assets they inherit from you exists and would be a much better option for your family.
In our planning process, we offer parents the option of creating a Lifetime Asset Protection Trust for your children’s inheritance. A Lifetime Asset Protection Trust safeguards the inheritance from being lost to common life events, such as divorce, serious illness, lawsuits, or even bankruptcy. The best part of these trusts is that they offer you—and your kids—the best of both worlds: airtight asset protection AND use and control of the inheritance. What’s more, you can even use the trust to incentivize your children to invest and grow their inheritance.
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 an LAPT. When you gift an inheritance to your kids via an LAPT, the trustee of the trust owns the assets, not your children.
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 because they never owned it in the first place. An LAPT can be built into a revocable trust, which becomes irrevocable at the time of your death and holds your loved one’s inheritance in continued trust for their lifetime.
A trustee of your choice owns the trust assets upon your death. Because the LAPT is discretionary, this individual 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.
And if you’re afraid that a trustee would keep your beneficiary from using the trust assets, you can build in protections to ensure your beneficiary has flexible use, unless there would be a significant risk of loss if he or she did. You can even allow your beneficiaries to become Co-Trustees and then sole Trustees of their own LAPT.
Contrary to common belief, Lifetime Asset Protection Trusts are not just for the amazingly wealthy. These protective trusts are actually 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.
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. This is accomplished by adding provisions to the trust that allow your child to become a Co-Trustee at a predetermined age. While 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. As Sole Trustee, your child would then be able to resign and replace themselves with an independent trustee for future asset protection.
A priceless gift
If you wish to protect your child’s inheritance from all possible threats while incentivizing them to invest and grow the money rather than squander and waste it, consider including a Lifetime Asset Protection Trust in your plan for the ones you love. Indeed, the trust’s highly flexible structure, combined with its bulletproof asset protection make it one of the most valuable gifts you can give your loved ones.
As your Personal Family Lawyer®, we can help you set up an LAPT to ensure that everything you worked so hard to leave behind offers the most positive and lasting impact possible. Start by scheduling a Family Wealth Planning Session today.
This article is a service of Levi Alexander, Personal Family Lawyer®. We don’t 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.
Photo by Valentin Antonucci from Pexels
