Leaving your hard-earned assets outright to your children, grandchildren, or other beneficiaries after you die may seem like the easiest and most desired form of distribution. Unfortunately such a scheme will make their inheritance easy prey for creditors, predators, and divorcing spouses. Instead, consider using discretionary trusts for the benefit of each of your beneficiaries.
What is a Discretionary Trust?
A discretionary trust is an irrevocable trust that can help protect the assets placed into it for the benefit of the trust’s beneficiary. A discretionary trust can provide protection from the beneficiary’s poor money-management skills, extravagant spending habits, personal or professional judgment creditors, or divorcing spouse.
Under the terms of a typical discretionary trust, the trustee is limited as to how much can be distributed to the beneficiary and when the distributions can be made, according to your wishes. You can make the terms and time frames as limited or as broad as you want. For example, you can provide that distributions of income can only for certain needs, such as health care expenses or educational expenses. You can also specify the age at which a trust beneficiary can receive distributions.
An added advantage of incorporating discretionary trusts into your estate plan is that your estate planning attorney can design the trust to minimize estate taxes, as the trust assets pass down from your children to your grandchildren (“generation-skipping planning”). In addition, you can specify who will inherit what is left in each beneficiary’s trust when the beneficiary dies, which will allow you to keep the trust assets in the family.
Discretionary trusts provide for virtually endless distribution choices (within certain parameters established under bankruptcy and creditor protection laws). In sum, a properly drafted discretionary trust will protect a beneficiary’s inheritance from creditors, predators, and divorcing spouses; avoid estate taxes when the beneficiary dies; and ensure that it ultimately passes to the beneficiaries of your choice.
When Should You Include Discretionary Trusts in Your Estate Plan?
You should consider including discretionary trusts in all of your trusts that will ultimately be distributed to your heirs, including:
- Revocable Living Trust
- Irrevocable Life Insurance Trust
- Standalone Retirement Trust
What Should You Do?
If you are concerned that your children, grandchildren, or other beneficiaries will not have the skills required to manage and invest their inheritance or will lose their inheritance in a lawsuit or divorce, then give us a call to discuss how to incorporate discretionary trusts into your estate plan.
Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, please contact us.