LIFETIME PROTECTIVE TRUSTS
Or ... WHY IS MY INHERITANCE IN A TRUST?
You're getting over the shock of losing someone you love. Now you find that you're not getting your inheritance, you're getting a trust. What gives?
It may not seem so at first glance, but receiving your inheritance in the form of a lifetime protective trust is actually a thoughtful gift from someone who cared for you. The type of trust that was provided for you is sometimes called a "self-trusteed" trust. That means that you are the trustee of the trust, managing the assets in accordance with the trust rules for your own benefit. You have significant control over the trust, but not so much control that you lose the following benefits.
- Increased Protection from Creditors. The trust provides that you are to use trust assets for your benefit and not for the benefit of your creditors. Unlike assets that are held outright in your name, you have an argument that creditors cannot generally attach assets of the trust. That means if you owe someone a great deal of money, say from a lawsuit, you may find that your own assets will have to pay that creditor but you may get to keep the trust assets. Even though creditors may be able to attach assets distributed from the trust to you, the existence of the trust can make you a less attractive target in lawsuits and other creditor actions. Because you are the trustee of the trust, you may want to get greater creditor protection by appointing a co-Trustee so that you can't be forced to distribute trust assets for a creditor to attach.
- Weaker Spousal Claims at Death or Divorce.The trust is designed to maker it harder for a spouse to claim trust assets in the event of your death or divorce. There may be a provision in the trust that allows you to choose to provide for your spouse in the event of your death or divorce, but the trust weakens claims a spouse may have to make a claim against trust assets which contradicts your choices. However, a trust does not usually provide any protection against claims for child support and some claims for alimony.
- No Conservatorship. If you become incapacitated, your co-Trustee or Successor Trustee can manage the trust assets for your benefit without a costly, court-supervised conservatorship.
- No Probate. In the case of death, the trust assets do not become a part of your probate estate and are not subject to the fees of probate administration or expenses.
WHAT DO I DO WITH THIS TRUST?
The benefits of having assets in a lifetime protective trust do come with some requirements. In principle, the important thing to keep in mind is that the benefits of the trust come from the fact that the trust is a separate entity. You risk losing those benefits if you don't treat the trust assets as separate from your own assets.
- The Trust is a Separate Taxpayer. Your trust will have its own taxpayer identification number and will have to file income tax returns. Usually we will have obtained the taxpayer identification number prior to distributing the assets to your trust.
Depending on the terms of the trust and the amount of income distributed, tax on the trust income may be paid directly by you on your tax return rather than on the trust's tax return. This can be a good thing, as there is a good chance you will be in a lower tax bracket than the trust. Taxation of trusts is complicated, and we recommend you use a good tax advisor to help you.
- Trust Assets Can Be Invested In Many Ways. When you first receive your inheritance, it will be in the form of a check made out to the Trustee of the trust. The Trustee (usually you) will need to open a bank or investment account in the name of the trust in order to deposit that check. To open a bank account you will need the tax identification number we provided you. You may need additional information to satisfy the bank or investment company's policies.
Once you have made the initial check liquid (if that is your desire) the Trustee can invest the trust assets in many ways provide they benefit the beneficiary. The trust may buy stocks and bonds, real estate and other assets.
- The Trusts Assets Are Separate From Your Assets. In order to provide the best available creditor protection for the trust assets, you should always maintain trust assets separate from your own assets. DO NOT deposit your own assets into trust accounts or otherwise comingle trust assets with your own assets without consulting with legal counsel first. Consider leaving assets in the trust for as long as possible. For example, rather than taking funds from the trust to purchase a residence, consider having the trust purchase the residence. If you need liquid assets from the trust, consider borrowing them rather than taking them outright. Once assets leave the trust, they lose the protection the trust afforded them.
- The Trust is Controlled by the Trustee. You are either the sole Trustee or one of the Cotrustees of the Trust. The Trustees control the investments and distributions of the trust. You have the authority to delegate trust duties or to name a Cotrustee. If you believe you may need the creditor protection of the trust, you should consider naming a Cotrustee, as this may strengthen the argument that the Trustee cannot distribute trust assets to your creditors.