When beneficiaries receive their inheritance in their own names, a legacy becomes vulnerable to creditors, lawsuits, divorce and a second estate tax when they die. Complicating matters further, if the heir receives means-tested government benefits, their benefits may be lost if they receive a direct inheritance.
There is a solution, explains the article “What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone” from Kiplinger. Having each beneficiary’s inheritance go into their own Beneficiary Controlled Trust can protect your legacy. Properly created and funded, the beneficiary may control, use and enjoy their inheritance with less risk than outright ownership. A Beneficiary Controlled Trust protects loved ones from the ups and downs of life. Divorce, lawsuits, creditor claims, bankruptcy are all unpleasant, but they do happen.
A Spendthrift Trust is used for beneficiaries who cannot be trusted to make good financial decisions, or who have people in their lives who cannot be trusted. It is like a spigot on a garden hose. The trustee decides when the beneficiary should receive access to assets, how much and when.
In a Beneficiary Controlled Trust, the beneficiary can also be the controlling trustee. The beneficiary has the same level of control as they would with outright ownership. They can make investment decisions. Assets, including real property or investment accounts, are owned by the trust.
After inheritance, the primary beneficiary has the ability to alter the level of control or protection, if they are concerned about upcoming risks. If the risk is particularly strong, for example, a contentious divorce, the primary beneficiary may resign as a trustee and appoint a trusted family member or professional to act as a trustee.
Another trust is a HEMS trust, one limited to providing distributions for the beneficiary’s Health, Education, Maintenance and Support. HEMS trusts are used to avoid estate tax. However, in some states, certain creditors, including divorcing spouses or health care providers, are permitted to pierce the trust and access assets.
If the primary beneficiary of a Beneficiary Controlled Trust wishes to enhance asset protection, they can appoint an independent trustee who serves as the distribution trustee. They may make distributions to the beneficiary at their discretion, which can provide another level of protection. The beneficiary may not wish to giver such broad discretion to an independent trustee, as in the case of Brittney Spears. This can be minimized by giving the primary beneficiary the right to remove and replace the independent trustee. The beneficiary will not have direct control over the distributions, but they decide who will manage the trust. The person may not be a related party or subordinate person.
Taxes should always be a consideration when creating trusts. Your estate planning attorney should review goals, concerns, and your unique situation to determine which type of trust works best for you and your family.
Reference: Kiplinger (Sep. 13, 2021) “What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone”