Lifetime Asset Protection Trusts: Asset Protection for Your Child’s Inheritance—Part 1

As a parent, you’re likely hoping to leave your children an inheritance. In fact, doing so may be one of the motivating factors driving your life’s work. But without taking the proper precautions, the wealth you pass on is at serious risk of being lost or squandered. In some instances, an inheritance can even wind up harming your children more than benefiting them. 

Creating a Revocable Living Trust offers some protection, but in most cases, you’ll be guided by an attorney to distribute assets in your 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 estate planning documents, check to see if this is how your trust leaves assets to your children. If so, you may not have been told about another option that can give your children access, control, and airtight asset protection for whatever assets they inherit from you. 

You may want to consider creating a Lifetime Asset Protection Trust for your children’s inheritance. A Lifetime Asset Protection Trust safeguards the inheritance from common life events, such as divorce, serious illness, lawsuits, or even bankruptcy. 

But that’s not all they do.

Indeed, the best part of these trusts is that they offer you, and your children, the best of both worlds: airtight asset protection as well as use and control of the inheritance. You can even use the trust to incentivize your children to invest and grow their inheritance.

Not Just for the Rich

Contrary to what you might think, Lifetime Asset Protection Trusts are not just for the extremely wealthy. Actually, these protective 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 and irresponsibly spending it. 

Without such guidance, most people spend their inheritance very quickly. In fact, one study found that, on average, an inheritance is completely spent in about five years to pay debt or through poor investments. Another study found that one-third of people who receive an inheritance actually had a negative savings within just two years. Of course, the smaller the inheritance, the more risk of it getting wiped out by a single unfortunate event like a medical emergency. 

Regardless of how much financial wealth you have (or don’t have), if you plan to leave your children anything at all, you should do everything you can to make it more likely that they protect and 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 these goals and so much more.

Not All Trusts are Created Equal

Most attorneys will advise you to put the assets you are leaving your children in a Revocable Living Trust—and this is the right move. But as mentioned earlier, most attorneys will advise you to structure the trust to distribute assets outright to your children at certain ages or stages. 

If you’ve used an online do-it-yourself will or trust preparation service, you will most likely be offered only two options: outright distribution of the entire inheritance to your children when you die, or partial distributions when they reach specific ages and stages as described above.

Either of those options leaves their inheritance, and your hard-earned money, at risk. Once assets pass into your child’s name, all the protection previously offered by your trust disappears.

For example, say your son racked up debt while in college, which can sometimes happen. If he were to receive one-third of his inheritance at age 25, creditors could take his inheritance to satisfy his debt if it’s paid to him in an outright distribution. 

The same would be true if your daughter gets a divorce after receiving her inheritance, only it would be her soon-to-be ex-spouse who would claim a right to the funds in a divorce settlement. Despite what you may have heard about an inheritance remaining separate property, once it’s in your child’s hands outright and unprotected, those assets are at risk.

There is just no way to foresee what the future has in store for your children. These events happen to families every day, and that’s not even taking into consideration that your children might simply frivolously spend the money and on unnecessary luxuries. 

Airtight Asset Protection—and Easy Access

Lifetime Asset Protection Trusts are specifically designed to prevent your hard-earned assets from being wiped out by the risks mentioned above. At the same time, your children will still be able to use and invest the funds held in trust as needed.   

For example, even though the assets are held in trust, your children would be able to invest those funds in things like stocks, a business, or real estate, provided they do so in the name of the trust. Plus, if your child needs to pull money out to pay for college, a new home, or medical bills, they can do that by asking a trustee—who’s chosen by you to oversee the money—for a distribution. You may even allow your child to become sole trustee at some point in the future, allowing him or her to make decisions about the management of the trust assets while also being the beneficiary of that trust. 

Obviously, creating a trust like this requires significant understanding of how to properly draft the trust, so don’t attempt to create one without guidance from an experienced attorney. As you can read about in this article, Lifetime Asset Protection Trusts offer additional benefits that can be used to teach your children how to invest and grow their inheritance so the assets you leave behind can be passed on to their children and beyond.

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Dahl Law Group

At Dahl Law Group, we’re not just a law firm. We’re your trusted advisor for your business and family from beginning to end. As your family and business grow, we will be there by your side. Our passion is providing you with peace of mind and protection through personalized estate and business planning.

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