How To Bullet-Proof A Child’s Inheritance

In this time of frequent divorce and economic uncertainties, asset protection has become a hot topic.  During the past several years, many seminars, attracting increasingly larger audiences, have promoted the use of various sophisticated asset protection vehicles.  Family limited partnerships or off-shore trusts have been recommended frequently to transfer assets away from the reach of potential creditors.  Nevertheless, the speaker at one such seminar got everyone’s attention when he noted the substantial protection provided by a properly drafted “dynasty trust”.

For years, wealthy families have created financial fortresses by using trusts.  They have gained the additional benefits beyond asset protection as they set up “dynasty trusts” to transfer wealth from generation to generation.  Much has been written about generation skipping planning for larger estates.  However, these strategies also apply to more modest estates.

The Dynasty Trust
A dynasty trust typically allows the children of the Trust maker lifetime use of the trust property with unused principal passing to future generations.

During the lifetime of a child of the Trust maker, a dynasty trust either allows all the income from the trust to be payable annually to the child or gives the trustee the discretion to add the accumulated income to the trust principal.  At the discretion of the trustee, the principal of the trust can typically be paid toward the health, education, maintenance and support of the child.  The principal of the trust is not included in the child’s estate.

Asset Protection Through Dynasty Trusts
There are two separate means of asset protection under a dynasty trust.  First, the trust should include spendthrift trust provisions to protect the principal and income from creditors’ claims.  Second, the trust, rather than the child, owns the assets held under a dynasty trust.  The assets are held for the benefit of the child.  The grandchild receives final distribution of the trust principal.

These provisions are strengthened when an independent Trustee is used initially or as a backup Trustee.  Under a dynasty trust, the child can receive benefits from the trust assets but can never directly own them. The trust provides:

1.  Creditor protection during the life of a child.
2.  Savings, tax savings and protection from creditors during probate of the child’s estate.
3.  Trust principal not becoming marital property.

If you have any questions or any uncertainties regarding when you should use asset protection for yourself or your children’s planning, contact Bruce Schilken at Davis Schilken P.C. by calling 303-670-9855 or by e-mail at baschilken@dslawcoloroado.com.

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