Why Establish an Asset Protections Trust?

The size of estates have grown today where middle class families are leaving substantial bequests to their children. 

As a result of significant inheritances being transferred to children, coupled with the fact that we live in a very litigious society, the trend today is toward establishing trusts for children to keep inheritances intact and in the bloodline. 

There are a number of asset protection and tax planning benefits to consider when leaving assets to family members in a trust.

Some of the most important reasons are detailed as follows:

(1) Assets inherited by your children which are administered and invested in a properly designed Asset Protection Trust will be protected from the spouses of your children in the event of divorce;

(2) Your Asset Protection Trust can include specific language designed to provide financial protection for your children from their creditors in the event of a lawsuit, bankruptcy, tax lien, or other financial hardship; and 

(3) Upon your child’s passing, all assets held in your Asset Protection Trust can be distributed, either outright or in further trust, to your blood relatives (usually your grandchildren), instead of to the spouses of your children, who depending upon the marital status of your children at your death, may or may not be your in-laws at that time.

When your assets continue intact for the benefit of your children and grandchildren, from one generation to the next, we call this estate planning strategy “multi-generational planning.” Unfortunately, when individuals only have a Will, their estate plan usually dies when they die. 

When utilizing an Asset Protection Trust, your inheritance can provide significant financial benefits to your children and grandchildren, while being protected and insulated from the potential claims of the creditors, predators, and divorcing spouses of your designated beneficiaries.

In fact, Asset Protection Trusts can provide flexibility and control over the assets during your children’s lives, so that the trustee you select can provide your children with broad access to the income and the principal of their APT. This is an important factor since many clients do not want to transfer assets to to their children at death in a manner which is a “gift with strings attached” or “rule from the grave.” 

An APT also allows clients to achieve their estate planning desire of making sure that upon the death of their child, either before or after the client’s passing, trust assets, (which may substantially grown in value during their child’s lifetime), are ultimately distributed to their grandchildren. 

In most cases, we often recommend that assets continue to be managed in trust for the benefit of grandchildren until an age when the client believes their grandchildren will be financially responsible to receive their inheritance outright. Of course, during the period when assets are managed in an APT, the trustee can have broad discretion to distribute both income and principal from the trust to the beneficiaries as needed for their health, education, maintenance and support. 

Another significant benefit of an APT is that if one or more of a client’s children die without leaving children of their own, then the funds held in their trust can be distributed to the surviving brothers and sisters of a deceased child, ensuring a blood-line distribution of your assets to surviving family members. 

Without a multi-generation APT, if your son or daughter dies, their entire inheritance, (including the growth and appreciation of all assets earned during the life of a child), may pass directly to your son-in-law or daughter-in-law, who may later get remarried and ultimately distribute your hard earned assets to a complete stranger, instead of your grandchildren. 

Since some clients would not want to disinherit their son-in-law or daughter-in-law, in such cases, the assets held in an APT, or a portion of the trust, may be earmarked to continue during the lifetime of an in-law, providing them with access to trust assets when needed for their health, maintenance, and support, but not to the next spouse of your in-law or to a nursing home to pay for their long term care expenses in the future. Upon the passing of an in-law, the trust provisions can be designed to distribute the remaining trust principal to grandchildren, or other designated individuals and/or charitable beneficiaries desired by the client.