Protect Your Children’s Inheritance with a Lifetime Trust

Sept 13, 2019 

By: Rebecca Strub - Edison Chapter Member   

You can protect your children’s inheritance with a lifetime trust and safeguard their inheritance (your money!) from common problems such as divorce, serious debt, devastating illness, and unfortunate accidents. 

Due to the asset protection lifetime trusts can provide, we call them Lifetime Asset Protection Trusts (LAPTs). LAPTs can also provide your heirs with an excellent educational opportunity in which they gain valuable experience managing and growing their inheritance, while enjoying asset protection.

To demonstrate how you can protect your children's inheritance with a lifetime trust, here we’ll describe a true story involving a tragic—yet easy to relate to—life scenario. While the following events are entirely true, the individual’s name has been changed for privacy protection.

The flooded penthouse

Eric was staying at a friend's penthouse apartment in New York City. Eric decided to run himself a bath. While the bath was running, another friend called and invited Eric to go out with him, which he did.

At about 2 a.m., Eric came back to the apartment and discovered he had made a huge mistake: he had left the bath running when he left the apartment. The resulting flood caused more than $400,000 in damage to the apartment and the one below it.

While there was insurance to cover the damage, the insurance company sued Eric for what's known as "subrogation.” That is, the company sought to collect the $400,000 they paid out to repair the damage Eric caused to the property. Because Eric's negligence in leaving the bath running caused the flood—a simple, but costly mistake—Eric was responsible for the damage.

Now here’s where the inheritance piece comes into play and why it’s so important to leave whatever you’re passing on to your heirs in a protected trust. If Eric had received an inheritance (or age-based trust distribution) outright in his own name, he would have lost $400,000 of it to this unfortunate mishap.

However, if Eric had received an inheritance in an LAPT, instead of an outright distribution, his inheritance would be protected from such a lawsuit—and just about any other threat. 

Using trusts to protect your children's inheritance

If you’re like most people, you hope to leave an inheritance for your children. Yet if you don’t take the proper precautions, your children may lose or squander the wealth you pass down. And in certain cases, the inheritance can even end up doing more harm than good.

When it comes to leaving an inheritance, most lawyers will advise you to place the money in a trust, which is the right thing to do. Traditionally, trust provisions distribute portions of the trust assets outright to loved ones at specific ages, such as one-third at 25, half of the balance at 30, and the rest at 35. Check your own will or trust now to see if it does this or something similar.

But giving outright ownership of the trust assets in this way puts everything you’ve worked so hard to leave behind at risk. A trust may protect your loved ones’ inheritance as long as a trust holds the assets. However, once the assets are disbursed to the beneficiary, they can be lost to future creditors, a catastrophic accident or illness, divorce, bankruptcy—or as in Eric’s case, a major lawsuit.

Further protection with a Lifetime Asset Protection Trust

Rather than risking their inheritance by leaving it outright to your children at certain ages or following certain life events, such as graduating college, you can protect your children's inheritance by using a LAPT. When you gift an inheritance to your kids via an LAPT, the trust owns the assets, not your children. Therefore, if your kids ever get divorced, file bankruptcy, have a major medical issue, or are ordered to pay damages in a lawsuit, they can’t lose their inheritance because they never owned it in the first place.

A trustee of your choice manages the trust assets upon your death. The trustee will have a discretionary power to distribute trust assets to your kids. This discretionary power means the trustee is not required to distribute funds according to a rigid structure, such as at specific ages. Instead the trustee can use their discretion to distribute trust assets to your children as appropriate. Thus, the LAPT protects the trust assets not only from outside threats like ex-spouses and creditors, but from their own poor judgment, if they are not financially mature.

And contrary to what some might think, LAPTs are not just for the mega wealthy. In fact, the asset protection they provide is even more valuable for those leaving behind a modest inheritance. The chances that a single unfortunate event might totally wipe out a modest inheritance are higher, as opposed to a much larger inheritance, which might survive even multiple mishaps.

An educational opportunity

Additionally, you can use an LAPT as a way to educate your child about investing, charitable giving, and even running a business. You can do this by adding provisions into the trust which allow your child to become co-trustee with another trustee who you’ve chosen and trust to support this aspect of your child’s education.

As co-trustee, your child would learn how manage the trust assets under the supervision of the other co-trustee you’ve named to guide them. You can also allow the beneficiary to become sole trustee later in life, once he or she has been properly educated and is ready to assume full control. As sole trustee, the beneficiary can resign and replace themselves with an independent trustee, if necessary, to protect the trust assets.

We can structure the trust in several different ways to meet your family’s unique needs, so be sure to ask us what options might be best for your particular situation.

A priceless gift

If you wish to protect your children’s inheritance from threats, while giving them an incentive to invest and grow the money rather than squander and waste it, consider including a Lifetime Asset Protection Trust. The trust’s highly flexible structure, combined with its asset protection make it one of the most valuable gifts you can give your loved ones.

We can help you set up an LAPT to ensure that everything you worked so hard to leave behind offers the most positive and lasting impact possible. Contact us or schedule your Family Wealth Planning Session online here.