You’re likely hoping to leave your children an inheritance as a parent. Doing so maybe one of the primary factors motivating your life’s work. But without taking the proper precautions, the wealth you pass on is at serious risk of being accidentally lost or squandered due to everyday life events, such as divorce, severe debt, devastating illness, and unfortunate accidents.
A sudden inheritance windfall can wind up doing your kids more harm than good in some cases.
Creating a will or a revocable living trust protects your kid’s inheritance. Still, in most cases, 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.
If you’ve created an estate plan, check to see if this is how your will or trust leaves assets to your children. If so, you may not have been told about another option to give your children access, control, and airtight asset protection for whatever assets they inherit from you.
As your Personal Family Lawyer®, 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 safeguard your kids’ inheritance from being lost to everyday life events, such as divorce, serious illness, lawsuits, or bankruptcy.
But that’s not all they do.
Indeed, the best part of these trusts is that they offer your kids the best of both worlds: 1) airtight asset protection and 2) 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 – more on all of this below.
Not Only For The Super Rich
Contrary to what you might think, Lifetime Asset Protection Trusts are not just for those with massive wealth. These trusts are even more helpful if you’re leaving a relatively modest inheritance because they can be used to educate your children about growing your family wealth instead of quickly blowing through it.
And without such guidance, most people blow through their inheritance very quickly. One study found that, on average, an inheritance is gone in about five years due to debt and poor investment. Another study found that one-third of people who receive an inheritance had negative savings within just two years.
The smaller the inheritance, the more at risk of getting wiped out by a single unfortunate event like a medical emergency, lawsuit, or severe accident.
To demonstrate how Lifetime Asset Protection Trusts protect families leaving behind a modest inheritance, we’ll describe a true story involving a tragic accident. While the following events are entirely accurate, 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 had 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. 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 name, he would have lost $400,000 of it to this unfortunate mishap.
However, if Eric had received his inheritance in a Lifetime Asset Protection Trust instead of an outright distribution, his money would be completely protected from such a lawsuit – and just about any other threat imaginable.
Don’t Take Any Chances
Regardless of how much financial wealth you have (or don’t have), if you plan to leave your kids anything, you should do everything you can to make it more likely to grow what’s left behind instead of losing it. This way, your resources can have a truly beneficial effect on their lives – and even the lives of future generations.
A Lifetime Asset Protection Trust can achieve each of those goals and so much more.
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 correct. However, most lawyers would have you distribute the trust assets 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 trust now to see if it does this or something similar.
But giving outright ownership of the trust assets in this way 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 trust holds the assets, 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 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. When you gift the inheritance to your kids via a Lifetime Asset Protection Trust, 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. A Lifetime Asset Protection Trust can be built into a revocable living trust, which becomes irrevocable at 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 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 their 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, and you probably don’t want your named Trustee making these decisions in a vacuum.
To address this issue, you can write up guidelines for 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.
Many of our clients add guidelines describing how they’d choose to make distributions in 10 different scenarios. These scenarios might involve the purchase of a home, a wedding, the start of a business, and travel. Some clients choose to provide guidelines around how they would make investment decisions. We can support you with this 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 teaching of a trusted mentor.
You can even allow your child to become a Sole Trustee later in life once they have 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.
Whether or not your child becomes a Co-Trustee or Sole Trustee, a Lifetime Asset Protection Trust allows you 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 specific 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 spend most of their inheritance on everyday expenses and consumables, they probably don’t make much sense. But 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, a Lifetime Asset Protection 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 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.
At Cheever Law, APC, 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, which starts at a valuable and educational Family Wealth Planning Session. The Life & Legacy Planning Session will allow you to get more financially organized than you’ve ever been before and make all the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session (aka Family Wealth Planning Session) to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
To learn more about our one-of-a-kind systems and services, contact us or schedule a 15-minute introductory call today.