Clients often struggle with how to leave assets to their children or other beneficiaries. This blog will give a brief overview of some of the most common and useful ways and their advantages and disadvantages.
- Divorce Protection Trust. This trust gives the beneficiary a right to withdraw whatever they choose at any time. This keeps the assets separate from a spouse, but does not provide creditor protection. The assets are included in the beneficiary’s estate. The trust is a grantor trust as to the beneficiary and can use the beneficiary’s social security number as its TIN.
- Ascertainable Standard Trust. This trust allows a trustee to manage the assets for the beneficiary. The trustee makes distributions for the beneficiary’s health, education, maintenance, and support. The trust would not be a grantor trust and would use its own TIN and file a 1041. If this trust continues until the beneficiary’s death, the trust would not be included in the beneficiary’s estate. A trust designed to continue until the death of the beneficiary is often called a “GST” trust because it need not be included in the beneficiary’s estate and can continue to “skip persons,” as long as GST exemption has been allocated.
- Asset Protection Trust. This trust allows a trustee to manage the assets for the beneficiary and make distributions in the trustee’s complete discretion. This type of trust can provide protection from a divorcing spouse and most creditors. The assets would not be included in the beneficiary’s estate (as long as the trustee is not the beneficiary). It would file a 1041 and have its own TIN, like the trust above.
- Incentive Trust. This trust gives the trustee specific instructions regarding when distributions would be made. For example, it can require distributions matching the income of the beneficiary or providing a bonus upon obtaining a degree, etc.
- Irrevocable Trusts. The discussion above assumes that these trusts would be set up after the client’s death via a revocable trust. However, the client could set up an irrevocable trust with those terms, as well. While an irrevocable trust may be useful for estate tax reduction, they cannot be changed by the client in most circumstances.
- 529 Plan. A 529 plan is an alternative to these trusts. Such a plan may provide income tax advantages if the assets are used for higher education. Such a plan allows the client to remain in control of the assets during the client’s lifetime and yet have the assets removed from the client’s estate for estate tax purposes. For clients who must have control during life, yet have estate tax concerns, this is something to investigate.
Of course, each client and each beneficiary is different. However, this provides a broad overview of the different ways to leave assets which you may want to consider for your clients.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555