According to The Chattanoogan in “Keeping Your Family from Losing Its Inheritance,” irrevocable trusts can protect the assets created by a family over a lifetime. They can also provide protection from events, such as divorce and substance abuse.
If we are lucky, we are able to leave a generous inheritance for our children. However, that doesn’t necessarily mean that we should give them easy access to all or some of the assets. Some people, particularly younger adults who haven’t yet developed money management skills, or others with problems like a troubled marriage or special needs aren’t ready or able to handle an inheritance.
In some cases, like when there is a substance abuse problem, handing over a large sum of money at once could have disastrous results.
Many people are not educated or experienced enough to handle a large sum of money. Consider the stories about lottery winners who end up filing for bankruptcy. Without experience, knowledge, or good advisors, a large inheritance can disappear quickly.
An irrevocable trust provides protection. A trustee is given the authority to control how funds are used, when they are given to beneficiaries, and when they are not. Depending on how the trust is created, the trustee can have as much control over distributions as is necessary.
An irrevocable trust also protects assets from creditors. This is because the assets are owned by the trust and not by the beneficiary. An irrevocable trust can also protect the funds from divorces, lawsuits, and bankruptcies, as well as manipulative family members and friends.
Once the money leaves the trust and is disbursed to the beneficiary, that money becomes available to creditors, just as any other asset owned by the person. However, there is a remedy for that if things go bad. Instead of distributing funds directly to the beneficiary, the trustee can pay bills directly. That can include payments to a school, a mortgage company, medical bills, or any other costs.
The trustee, not the beneficiary, is in control of the assets and their distributions.
The person establishing the trust (the “grantor”) determines how much power to give to the trustee. The grantor determines whether the trustee is to distribute funds on a regular basis or whether the trustee is to use their discretion with when and how much they give to the beneficiary.
Here’s an example. If you’ve given full control of the trust to the trustee and the trustee decides that some of the money should go to pay a child’s college tuition, the trustee can send a check every semester directly to the college. The trustee, if the trust is written this way, can also put conditions on the college tuition payments, mandating that a certain grade level be maintained or that the student must graduate by a certain date.
Appointing the trustee is a critical piece of the success of any trust. If no family members are suitable, then a corporate trustee can be hired to manage the trust.
An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include irrevocable trusts.
Reference: The Chattanoogan (July 5, 23019) “Keeping Your Family from Losing Its Inheritance.”