By Cory Howes
There are numerous types of trusts aimed at fulfilling different estate planning purposes. If you are anticipating an inheritance, as many of us are with an aging Baby Boomer generation, there is a special type of trust designed to help protect that inheritance: an inheritor’s trust.
Purpose of an Inheritor’s Trust
An inheritor’s trust is a trust that has been established for the purpose of receiving a beneficiary’s inheritance in a way that is protected legally and financially. In order to fulfill its intended purpose, an inheritor’s trust must be set up in a way that follows numerous tax and legal constraints.
Most states forbid what is referred to as a “self-settled trust.” A self-settled trust is an irrevocable trust established by an individual, for his or her own benefit, with the intent to protect the trust assets from creditors. Therefore, once you receive an inheritance, it is very challenging to protect the inheritance assets yourself. Fortunately, the inheritor’s trust provides an effective, legal, and tax-compliant alternative.
Inheritor’s Trust Explained
If you are expecting an inheritance from a loved one, and he or she is unwilling or unable to leave your inheritance in a trust, you can protect these new assets with an inheritor’s trust. However, you cannot set up the trust yourself because of the “self-settled trust” rule discussed above, so you will need to work with your loved one to establish the trust.
Instead of receiving the inheritance outright, the trust will be the recipient of the inheritance. The trust will typically include a spendthrift clause to protect against creditors, a more drawn out distribution schedule, or provisions granting only discretionary distributions to you. Once the trust has been drafted, your loved one will need to sign the instrument as the creator (grantor), but you will be the beneficiary.
There are several benefits to an inheritor’s trust:
- The inheritance can be excluded from your taxable estate, potentially saving your family estate taxes;
- The trust can be a more cost-effective way to protect the assets instead of your loved one revising their existing plans;
- Upon your death, the inheritance will be distributed outside of your probate estate which can help ensure privacy and lower attorney fees and administration costs;
- The inheritance will be protected from creditors, lawsuits, and divorcing spouses;
- In some circumstances, the inheritance can even be controlled and managed by you, as a trustee; and
- You can decide how remaining trust assets will be distributed after you pass away if the trust gives you that power.
An inheritor’s trust is a sophisticated, yet powerful estate planning tool. An inheritor’s trust is ideal for anyone who is to receive a substantial, outright inheritance that may need additional asset and tax protection.
Consult with an Estate Planning Professional
Estate planning can be complicated, but it is essential in protecting you and your loved ones’ financial futures.
If you expect to receive an outright inheritance and desire to maintain control, gain superb asset protection, and use all possible avenues to avoid estate and transfer taxes, an inheritor’s trust may be right for you. Give us a call today to learn about whether this estate planning tool is an option for you.