Monthly Archives: April 2023

WHAT IS AN INHERITANCE PROTECTION TRUST?

1.         What Is It?

An Inheritance Protection Trust is an irrevocable trust created by a deceased person’s estate plan. Usually, the trust is for one of the decedent’s children and is for a responsible and healthy adult beneficiary — not someone in need of a Special Needs Trust. It continues for the life of the beneficiary.

2.         Who Is The Trustee?

The beneficiary may also serve as the trustee or has the right to name another, independent, trustee. Consequently, an Inheritance Protection Trust is also referred to as a beneficiary-controlled trust.

3.         What Are The Benefits?

a.         Estate Tax Protection. The trust assets may be exempt from federal estate tax upon the death of the beneficiary. When calculated in the taxable estate of the deceased beneficiary, trust assets would not be counted.

b.         Creditor protection. Trust assets are protected from creditors of the beneficiary (remember, this is an irrevocable trust with its own Tax Identification Number.)  There are different levels of protection depending on how the trust is drafted. 

c.         Divorce.  Trust assets are the separate property of the beneficiary and may not be converted to community property during the marriage. Thus, an ex-spouse cannot penetrate the trust should the beneficiary’s marriage end in dissolution. 

d.         Family Protection. The trust may ensure family assets pass to the next generation rather than to surviving spouses who may remarry. Thus, assets may bypass spouses and pass to grandchildren.

4.         What Are The Steps For An Asset Protection Trust?

The trust is drafted into a will by the testator/testatrix (person who makes a will) or revocable trust by the grantor (person who makes a trust) in his or her lifetime.  The trust is then funded with assets at the death of the testator/testatrix or grantor.  If a trust is created during the life of the testator/testatrix or grantor, it requires an irrevocable gift and loss of control over the gifted assets.

The trust itself requires appointing a trustee, preparing a Certification of Trust, applying for a Tax Identification Number, and opening a financial account in the name of the trust.

5.         What Is The Cost To Include This Trust In A Will or Revocable Trust?

A typical cost would be an additional $1,500 to $2,000 to include an Asset Protection Trust in a will or revocable trust.