The Normal Goals

Here are the goals of passing an inheritance to loved ones in trust instead of outright:

 

Protect the estate for them, for as many generations as possible from:

 

A. Their disability, inability, inexperience, or lack of initiative if they receive too much too young.

 

B. Their own risk of loss to catastrophic creditor claims, meaning lawsuits in our litigious society.

 

C. Predators in our society, such as divorcing spouses of your descendants, or spouses of your descendants who survive your descendants and remarry someone outside of your family.

 

D. Death taxes on all amounts that you can make tax-free when you die, for as many generations as you can keep the original amounts and any of their growth in value free from death taxes. (Tax protection is often merely a side benefit.)

 

At the same time, many people want to give maximum dignity of control to their descendants by allowing them to serve as their own Trustee of an inherited trust after they reach a suitable age and level of maturity and responsibility.

 

If these goals appeal to you, passing your estate in a protective trust is a wonderful gift of love that you make to your descendants. It gives them more freedom than they would have if the assets went to them outright, because they have control without risk of loss to creditors and predators.

 

Risks of Self Control of an Inherited Trust

 

Asset protection of an inheritance for your loved ones, coupled with giving them control of an inherited trust is weakened if they are subject to litigation where someone seeks to pierce the inherited trust to take its assets or part of its assets by arguing that dominion and control over trust assets is functionally equivalent to ownership for purposes of creditors or divorcing spouses who seek to pierce the trust to obtain assets from the trust.

 

Many advisors who fear such an argument being made use the approach of naming someone other than the trust beneficiary to serve as Trustee full time, and preclude the beneficiary from serving as Trustee. But that approach violates the goal most people have of giving maximum dignity of control to their loved ones who will inherit.

 

A watered down approach is to allow the beneficiary part of the control by letting the beneficiary serve as Trustee for purposes of making trust distributions for the benefit of the Trustee-beneficiary, and requiring that an investment advisor make all investment decisions for the trust. But this watered down version of giving the dignity of control still risks the dominion and control argument being successful for creditors of the beneficiary.

 

Another drawback to having someone other than the beneficiary serve as Trustee and requiring some other Trustee or even an investment advisor, aside from violation of the goal of giving maximum dignity of control to a loved one, are the fees and expenses incident to having a different Trustee even if only for investment decisions.

 

The better solution is to avoid the dominion and control argument by prohibiting a beneficiary from serving as Trustee of the beneficiary's inherited trust only when the beneficiary is under duress, normally defined in the trust document as being involved in litigation or government attempts to obtain funds from the Trust.

 

Asset segregation does not replace liability insurance, it merely provides supplemental protection against loss of other assets in the event an inside claim results in some catastrophic judgment against the owner of an asset.