A Lifetime Asset Protection Trust Safegaurds a Child's Inheritance for Life

Airtight Asset Protection of Your Children’s Inheritance – Part 1

Written by Jordan W. Jacob, Esq.

January 9, 2020
Ari stands next to a locked safe

A Lifetime Asset Protection Trust can safeguard a child’s inheritance from being lost to common life events, such as divorce, serious illness, lawsuits, or even bankruptcy. But, that is not all it does.

As a parent, leaving your children an inheritance is likely one of the motivating factors driving your life’s work. Without taking the proper precautions, the wealth you pass on is at serious risk of being lost or squandered. In some instances, receiving an inheritance can wind up doing more harm than good to your children!

Creating a will or a revocable living trust does offer some protection. In most cases, a will or trust directs that your assets be distributed to your children outright, in their pocket, at a specific age or stage (such as at 18 or graduation from college), or at staggered ages (such as one-third at age 25, half the remaining balance at age 30, and the rest at age 35).

If you have already created estate planning documents, you should check to see if one of these methods is how your assets are being left 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.

In my planning process, I always offer parents the option of creating a Lifetime Asset Protection Trust for their children’s inheritance.

The best part of a Lifetime Asset Protection Trust is that it offers you—and your children—the best of both worlds: airtight asset protection AND use and control of the inheritance. You can even use the trust to incentivize your children to invest and grow their inheritance!

A Lifetime Asset Protection Trust is not just for the über rich

Contrary to what you might think, Lifetime Asset Protection Trusts are not just for the super wealthy. These protective trusts are even more useful if you are leaving a relatively modest inheritance and they can be used to educate your children about how to grow your family wealth, instead of quickly blowing through it.

Without such guidance, most children blow through their inheritance very quickly. In fact, one study found that, on average, an inheritance is totally gone in about five years due to debt and poor investment. Another study found that one-third of people who receive an inheritance actually had a negative savings within just two years.

Not to mention, the smaller the inheritance, the more at risk it is of 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 ensure they grow what is left to them, 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

Most lawyers will advise you to put the assets you are leaving your kids in a revocable living trust—and this is the right move. However, as mentioned above, most lawyers would structure the trust to distribute those assets outright to your children at certain ages or stages.

Why? Because this requires the least amount of work to design and the least amount of work for the trustee to follow when it comes time for distribution.

If you have used an online do-it-yourself will or trust-preparation service like LegalZoom®, Rocket Lawyer®, or any of the newer online options, you will most likely be offered only two distribution choices: outright distribution of the entire inheritance to your children, or partial distributions when they reach specific ages and stages as described above. Either of those options leaves your children’s inheritance—and your hard-earned and well-saved money—at risk.

Once assets pass into your child’s name, all of the protection previously offered by your trust disappears. Despite what you may have heard about an inheritance remaining separate property, once it is in your child’s hands, outright and unprotected, those assets are at risk.

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 if it is paid to him in an outright distribution. The same thing 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.

There is just no way to foresee what the future has in store for your children. These kind of events happen to families every day. This does not even take into consideration that your children might simply blow through the money and spend it all on unnecessary luxuries.

Airtight asset protection—and easy access

A Lifetime Asset Protection Trust is specifically designed to prevent your hard-earned assets from being wiped out by such risks. 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 stocks, start a new business, or purchase 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 is chosen by you to oversee the money—for a distribution.

As I will cover next week, you may even allow your child to become the Sole Trustee at some point in the future, allowing him or her to make their own decisions about their trust’s management.

Obviously, creating a Lifetime Asset Protection Trust requires significant understanding of how to properly draft the trust, so do not attempt to do create one without the guidance of an experienced estate planning lawyer. Lifetime Asset Protection Trusts offer additional benefits that can be used to teach your children how to invest and grow their inheritance, so that the assets you leave behind can be passed on to their children and beyond.

As your Personal Family Lawyer®, I can guide you to make informed, educated, and empowered choices to protect yourself and the ones you love most.  Schedule an initial consultation today to learn more.

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