The following is an article from the May 2017 issue of "Get Your Ducks in a Row" Carolina Family Estate Planning's free newsletter. You can read the rest of the issue, as well as back issues of our newsletter online at www.carolinafep.com/library/newsletters/ or subscribe for free at www.carolinafep.com/newsletter.cfm
In March, I started a discussion about protecting your child’s inheritance from future speedbumps in life such as lawsuits, malpractice claims, disability, divorce, or dilution by in-laws or future in-laws (or future ex-in-laws). And though this sounds like powerful protection, you might have been left thinking, “Gee, this sounds like it could be complicated or would involve trying to ‘pull strings from the grave.’” But it doesn’t have to be that way. Let’s discuss how it works.
The “Old Way” of Planning
With traditional planning, many basic wills and living trusts have been drafted to leave the inheritance to the beneficiaries “outright,” meaning that upon your death, your estate would distribute or retitle assets directly into your children’s (or other beneficiaries’) names. Unfortunately, once your child receives an outright distribution, the assets are exposed to the claims of spouses in divorce, creditors, and lawsuits, and the assets can disqualify your child from receiving need-based government benefits if they are disabled or become disabled after your death.
The “New Way” of Planning: Lifetime Protection Trusts
“Enhanced planning” leaves your beneficiaries’ shares of their inheritance in separate trusts created upon estate settlement, following your death. We call these “Lifetime Protection Trusts” for your beneficiaries. You have the option to allow each beneficiary to control his or her own Lifetime Protection Trust, so they have virtually all the same rights as direct ownership, without the liability exposure of direct ownership.
Now certainly, if you have a troublesome beneficiary, you may need to create some ground rules—a bit of “controlling from the grave”—to protect them from themselves. But if that’s not necessary, you may design the plan so the beneficiary is his or her own Trustee, while still enjoying the protection that the trust provides. As Trustee, the beneficiary can control how the inheritance is invested, how it is distributed, and who receives the remaining inheritance when they die, though many clients opt for a “limited power of appointment,” which requires that the assets stay in the family bloodline (e.g., your grandchildren), while allowing the beneficiary to choose who within the bloodline receives what percentage of the inheritance.
The Benefit of “20/20 Hindsight”
A Lifetime Protection Trust allows your beneficiary to “ramp up” the degree of asset protection provided as needed, with the assistance of third parties. For example,
if your beneficiary is in the midst of a major lawsuit, they can appoint an independent co-trustee who must approve distributions from the trust. Because the co-trustee cannot be forced to approve a distribution, a court cannot require that funds be distributed from the trust and awarded to another party. For an additional level of protection, the Lifetime Protection Trust also permits the appointment of an independent “Trust Protector,” who has the power to “lock down” the Trust even more tightly if it is under attack. In either case, the beneficiary maintains indirect control of the inheritance by influencing who is appointed as co-trustee or Trust Protector.
If you’re a past client and did not opt for this protection in your original planning, it may be time to consider an update. (If you’re not sure, you can send an email to
[email protected] and we’ll take a look for you.)
If you haven’t done your planning yet, why not? What’s holding you back? We make this as easy and as painless a process as possible. Give us a call at 919-694-4437 or send an email to inf[email protected] to discuss next steps.
I hope you’ve found this series helpful. To your health, wealth, and happiness,