Protecting Your Children’s Inheritance
Most people either have a very simple Will or no Will at all. As a result, most surviving children receive their inheritance outright and free of trust. An outright inheritance isn’t usually a problem unless the child is a minor, gets divorced, gets sued or has creditor issues. In these types of cases, the inheritance might be taken by the child’s creditors or divorcing spouse.
The best way to protect your children from their potential creditor issues is to leave their inheritance in a trust for the child’s lifetime. A trust is a legal arrangement in which the assets of a trust are managed by the Trustee for the benefit of a beneficiary (i.e., your child). Each adult child can serve as his or her own Trustee if the parent believes the child is responsible. If not (or if the child is a minor), the parent can select another responsible person (usually a relative or family friend) or a bank’s trust department to serve as Trustee of the child’s trust. [NOTE: Minors cannot legally own property in Texas, so a trust is the superior method of providing an inheritance for minor children.]
In a typical trust arrangement, the Trustee can distribute as much income and/or principal from the trust as is necessary for the beneficiary’s health, education, maintenance or support. This generally includes expenses for food, clothing, housing, medical, vehicles, education and vacations. More importantly, no one can force the Trustee to distribute trust assets to satisfy any debts of the beneficiary or judgments against the beneficiary (including bankruptcy and divorce). Historically, trusts have been commonly used to reduce or eliminate estate taxes for wealthy individuals. But now, trusts are becoming more popular as an asset protection strategy for more modest estates.
In summary, a trust arrangement allows your descendants to fully enjoy the inheritance you have given them while insulating the assets from your child’s creditors’ claims. Sometimes you can get your cake and eat it, too! If you have any questions or if you would like to discuss adding a trust to your estate plan, please give us a call.