If you are expecting an inheritance, an estate planning tool known as a trust may prove useful, depending on your circumstances. Among the numerous types of trusts aimed at fulfilling different estate planning purposes, an inheritor’s trust is specially designed to help protect an inheritance.
Purpose of an Inheritor’s Trust
A future beneficiary establishes an inheritor’s trust to receive, protect, and manage the money and property (assets) they expect to inherit, with the primary goal of safeguarding those assets and preserving family wealth. With this type of strategy, instead of the beneficiary receiving an inheritance as an outright gift in their own name, the assets are distributed to the trust. Because the trust, not the beneficiary, becomes the legal owner of the property, those assets are generally better insulated from the beneficiary’s personal financial risks (such as claims from creditors, lawsuits, or a spouse in a divorce settlement).
To fulfill its intended purpose, an inheritor’s trust must be set up in a way that follows certain tax and legal rules. Most states do not permit individuals to create an irrevocable trust for their own benefit and then use that trust to shield their assets from creditors. This type of trust, known as a self-settled or first-party trust, typically offers limited protection. A handful of states offer a domestic asset protection trust (DAPT), but the protections vary widely and are not always recognized by other states. Because of these restrictions, once you have received an inheritance in your own name, it can be very challenging to protect it after the fact. An inheritor’s trust solves this problem because it is set up before the inheritance is received. Since the property that funds the trust comes from someone other than the settlor (such as a parent), the trust is treated as a third-party trust. Third-party trusts offer much stronger protection, making them a generally safe way to hold inherited assets.
Inheritor’s Trust Explained
If you are expecting an inheritance from a loved one, you can better protect the new assets with an inheritor’s trust. Instead of you receiving the inheritance outright, the trust will be the recipient. The trust will typically include a spendthrift clause to protect against your creditors, a more drawn-out distribution schedule, and, possibly, provisions granting very specific distribution standards (full discretion if the trustee is a third party or distributions for only health, maintenance, and support if you are the trustee).
An inheritor’s trust offers you, as the beneficiary, several potential benefits:
- The inheritance can be structured to be excluded from your own taxable estate, which helps reduce potential estate taxes upon your death and increases the wealth passed on to your children or other heirs.
- Upon your death, the inheritance in the trust will be distributed outside your probate estate, avoiding the need for probate court, which can help ensure privacy and often reduce attorney’s fees and other administration costs.
- Your inheritance will have greater protection from your creditors, lawsuits, and divorcing spouses.
- In some circumstances, the trust can be structured to give you a high degree of control over investment decisions by naming you the investment trustee.
- The trust’s terms can grant you a limited power of appointment, which allows you to decide who will receive any property remaining in the trust upon your death, offering flexibility as your circumstances change.
- It can protect you from your own overspending or financial missteps such as impulsive purchases, poor investment decisions, or giving money away too freely during vulnerable moments.
An inheritor’s trust is a sophisticated but powerful estate planning tool, ideal for anyone who is to receive an outright inheritance that may benefit from additional asset and tax protection.
Consult with an Estate Planning Professional
Estate planning is essential for protecting your financial future and that of your loved ones. If you expect to receive an outright inheritance and want to maintain control, gain superior asset protection, and reduce estate and transfer taxes upon your death, an inheritor’s trust may be right for you. However, due to their complexity and dependence on current tax law interpretations, such trusts require careful planning and execution. Contact us to determine whether this estate planning tool is an option for you.
Call Santaella Legal Group, serving all of California, at (925) 831-4840, or reach out to us here.