Estate planning, like most other things, uses a vast array of tools to accomplish its goal. One of the tools is a trust. But there are more trusts, as the old farmer said, than you can shake a stick at—revocable, irrevocable, living, testamentary, charitable remainder, qualified domestic, special needs, spendthrift, asset protection, and the list goes on and on.
One valuable trust that often gets overlooked is the Inheritor’s Trust, which gives added protection and more control to those who inherit wealth. For example, Sam is an adult child. He’s done well financially. He knows he’ll receive a sizable inheritance when his parents die. But because of his success, the inheritance will eventually be included in Sam’s estate and potentially be taxed. Any income and capital gains from the inheritance would be taxed at Sam’s tax rate. Additionally, receiving the inheritance outright makes those assets vulnerable to Sam’s creditors or to his spouse if there is a divorce. The Inheritor’s Trust addresses those issues.
The Inheritor’s Trust is an irrevocable trust set up by the person who will inherit assets, not the person(s) who will give the assets. It provides all the benefits, control, and rights just as if the inheritance had been received outright, and it provides protection from taxes, creditors, and divorce not available if an inheritance is received outright. The Trust can be used for lifetime gifts or property and bequests. And the person who sets up the trust is the primary beneficiary and may also be the sole trustee or a co-trustee.
Bob Carlson, editor of Retirement Watch, shares other information about Inheritor’s Trusts:
- The trustees have the power to distribute assets from the trust to the primary beneficiary at their discretion for the health, education, maintenance, and support of the beneficiary.
- While the trust has secondary and contingent beneficiaries, the adult child, the primary beneficiary, has a broad power of appointment that allows him or her to change beneficiaries without interference from the other beneficiaries or objections about management of the trust.
- The power of appointment can’t be used to benefit the primary beneficiary, his or her estate, beneficiaries of the estate, or creditors.
- It is a good idea to have a trust provision that says the prudent-person investment standard doesn’t apply.
- To maximize tax benefits and creditor protection, it often is best that the primary beneficiary not be the sole trustee.
- The primary beneficiary as trustee has sole control over the investment decisions, though he or she can delegate the investment decisions to an investment manager.
- The other co-trustee has the sole power to make distributions from the trust in his or her absolute discretion.
- It’s usually best to name either a close friend of the primary beneficiary or a corporate trustee as the co-trustee.
- Under the trust agreement, the primary beneficiary has the power to remove and replace the other co-trustee. But any successor to the co-trustee must be an unrelated party and can’t be a subordinate employee of the beneficiary.
There are many more considerations when it comes to an Inheritor’s Trust, including what to do when a minor is the primary beneficiary. It’s best to work with an experienced estate professional who can guide you through the maze of Inheritor’s Trust pros and cons.
This article is presented as information only and should not be considered financial, tax, or legal advice.
