If you are planning to leave behind any amount of money or assets for your children, you likely want to do everything you can to protect your children’s inheritance from being lost or squandered.
The most recent example of someone irresponsibly blowing through their inheritance because it was not properly protected is the case of Clare Bronfman. Ms. Bronfman is the heiress to the Seagram’s liquor fortune who infamously used hundreds of millions of dollars from her trust fund to support the cult group Nxivm. Last year, she plead guilty in Federal court and is set to be sentenced later this month.
Are you leaving behind hundreds of millions of dollars to your children? Probably not. Are your children going to use their inheritance to fund a criminal cult? Probably not. But, if you are not around to teach your children how to be responsible with the money you leave behind for them, then you want to make sure there are proper safeguards in place to protect your children’s inheritance.
Most lawyers will advise you to distribute your assets to your children, outright and free of trust, at specific ages and stages, based on when you think they will be mature enough to handle an inheritance. However, there is a much better choice for safeguarding your family wealth.
A Lifetime Asset Protection Trust is a unique estate planning tool that is specifically designed to protect your children’s inheritance from unfortunate life events such as divorce, debt, illness, and accidents, while at the same time giving them the ability to properly and appropriately access and invest their inheritance.
Last week, I discussed how a Lifetime Asset Protection Trust differs from standard trusts. Here, in Part 2, I will explain the Trustee’s role in the administration of a Lifetime Asset Protection Trust, as well as how this type of trust can teach your children to manage and grow their inheritance, so it can support them to become wealth creators and enrich future generations.
Total discretion for the Trustee to protect your children’s inheritance
As mentioned last week, most standard trusts require the Trustee to distribute assets to beneficiaries in a structured way, such as at certain ages or stages. Other times, a Trustee is required to distribute assets only for specific purposes, such as for the beneficiary’s “health, education, maintenance, and support” – also known as the “HEMS” standard.
In contrast, a Lifetime Asset Protection Trust gives the Trustee full discretion on whether or not to make distributions. The Trust leaves the decision of whether to release trust assets totally up to the Trustee. The Trustee has full authority to determine how and when the assets should be released. This decision is based on the beneficiary’s needs and the circumstances going on in his or her life at the time.
For example, if your child was in the process of getting divorced or in the middle of a lawsuit, the Trustee could refuse to distribute any funds. Therefore, in the event your child be ordered to pay damages resulting from a lawsuit, the Trust assets remain shielded from a future ex-spouse or a potential judgment creditor.
Because the Trustee controls access to the inheritance, those assets are not only protected from outside threats like ex-spouses and creditors, but also from your child’s own poor judgment. For example, if your child develops a substance abuse or gambling problem, or wanted to use the money to fund a sadistic cult, the Trustee could either refuse to distribute any funds or withhold distributions until your child receives the appropriate treatment.
A lifetime of guidance and support
Given that distributions from a Lifetime Asset Protection Trust are 100% up to the Trustee, you may be concerned about the Trustee’s ability to know when to make distributions to your child and when to withhold them. Granting such power is vital for asset protection, but it also puts a lot of pressure on the Trustee. As such, you probably do not want your named Trustee making these decisions in a vacuum.
To address this issue, you can write guidelines to the Trustee, providing the Trustee with direction about how you would like the trust assets to be used for your beneficiaries. This ensures the Trustee is aware of your values and wishes when making distributions, rather than simply guessing what you would have wanted.
Leaving a Trustee to guess your intentions often leads to problems down the road.
Trustee guidelines describe how you would choose to make distributions in different scenarios during the beneficiary’s lifetime. These scenarios might involve the purchase of a home, payment of wedding expenses, the start of a business, and/or travel. Some clients choose to provide guidelines around how they would make investment decisions, as well. This is something I can assist you with if you decide to use a Lifetime Asset Protection Trust.
An educational opportunity
Beyond the benefits of being able to protect your child’s inheritance for their entire life, a Lifetime Asset Protection Trust can also give your child hands-on experience managing financial matters, like investing, running a business, and charitable giving. Your child will learn how to do these things with support from the Trustee you have chosen to guide them.
This is accomplished by adding provisions to the trust that allow your child to become a Co-Trustee at a predetermined age. Serving alongside the original Trustee, your child will have the opportunity to invest and manage the trust assets under the supervision and tutelage of a trusted mentor.
You can even allow your child to become Sole Trustee later in life, once he or she has gained enough experience and is ready to take full control. As Sole Trustee, your child would be able to resign and replace themselves with an independent trustee, if necessary, for continued asset protection.
Regardless of whether or not your child becomes Co-Trustee or Sole Trustee, a Lifetime Asset Protection Trust gives you the opportunity to turn your child’s inheritance into a teaching tool.
Do you want to give your child the ability to leave trust assets to a surviving spouse or a charity upon their death? Or would you prefer that the assets are only distributed to his or her biological or adopted children? You might even want your child to create their own Lifetime Asset Protection Trust for their heirs.
I offer my clients a wide variety of options that can be tailored to fit their particular values and family dynamics. Be sure to ask which options might be best for your particular situation.
Is a Lifetime Asset Protection Trust right for you?
Of course, a Lifetime Asset Protection Trust is not for everyone. If your children are going to spend the vast majority of their inheritance on everyday expenses and consumables, then a Lifetime Asset Protection Trust probably does not make much sense. However, if you want to protect your children’s inheritance for their entire life, and ensure the assets you are leaving behind are able to be invested and grown over the long term, a Lifetime Asset Protection Trust can be immensely valuable.
Meet with a Personal Family Lawyer® like myself to see if a Lifetime Asset Protection Trust is the right option for your family. In the end, it is not about how much you are leaving your loved ones that matters. It is about ensuring that what you do pass on is there when it is needed most and put to the best use possible.