What if we told you that you could protect your children’s inheritance from claims made by his or her spouse, against creditors who may sue your child over negligent acts (like drinking and driving, texting and driving, or bad business decisions) and you could ensure that what you pass on to them could then pass on to future generations free of probate, free of any state inheritance taxes and free of federal estate taxes, would you be interested? This is exactly what Family Asset Protection Trusts can do. This article explains more about the basics of Family Asset Protection Trusts and why they are a great gift to future generations.
A Family Asset Protection Trust is a trust created in either your Will or Revocable Living Trust that creates an irrevocable trust for each of your children. What provides asset protection in this trust is that it is created by someone other than the beneficiary and the trustee has limitations on distributions of some of the trust income and principal. The reason that Family Asset Protection Trusts are considered a gift is because someone else needs to create the trust to get this level of asset protection.
Two of the most common questions around Family Asset Protection Trusts are how do my children receive money from the trust and who’s in control of the trust assets. When we look at trust distributions we look at both the principal of the trust (the assets owned by the trust) and the income of the trust (the money those assets made over the last year). The most frequent distributions of income from a Family Asset Protection Trust are:
- Payment of all income to the beneficiary;
- Payment of income for the health, education, maintenance and support of the beneficiary; or
- Payment of the income at the discretion of the trustee
Each of these options have various pros and cons and the one that is right for your family depends on your specific situation. For example, if you aren’t concerned about how your child will spend the money, payment of all income to the beneficiary gives your child a distribution of cash each year and provides asset protection over the rest of the trust principal.
Distribution of the principal also depends on your situation and goals for the future. Typical distributions of principal include:
- Withdrawal rights up to a certain percentage;
- Distributions for the health, education, maintenance and support of the beneficiary;
- Incentive provisions; or
- Distributions at the discretion of the trustee.
The most common of these are an annual withdrawal right of up to 5%. This allows your child to receive up to 5% of the principal each year, providing for some additional income if they need it, but if they don’t need the additional income, they can choose to not take the withdrawal and continue to grow the assets in the trust.
You can allow your child to act as trustee of the Family Asset Protection Trust, but in doing so you will lose some of the asset protection because once your child has control of the assets, some of the creditor protection is lost. You could allow a child to act as trustee to manage the assets and have an independent trustee act as the distribution trustee to maintain some asset protection.
Anything that remains in the Family Asset Protection Trust when your child passes away would not be included in their estate and would then be passed on free of probate and estate taxes. Since none of us have a crystal ball to know what would be beneficial to future generations a Family Asset Protection Trust can be created to allow your child to determine the terms of the trust for their children. This helps to create a lasting family legacy for years to come.
If you are interested in learning more about Family Asset Protection Trusts and how they may be beneficial to your family we would love to chat with you. You can schedule a free 15-minute consultation here.