What Is A Lifetime Asset Protection Trust?

Many of our clients choose to add what we call “lifetime protection trusts” to their revocable living trust to better protect their children’s inheritance. A lifetime protection trust is a testamentary trust that is a sub-trust of your revocable living trust that kicks in when you pass away.


Make Your Revocable Living Trust Even Better

If you are a California resident and you have assets that would go through probate - a home /or bank and brokerage accounts worth more than $184,500, then you need a revocable living trust as the foundation to your estate plan. A well written and funded revocable living trust will allow your family to avoid the high costs and hassles of probate when you pass away.

However, is that enough? Many of our clients choose to add what we call “lifetime protection trusts” to their revocable living trust to better protect their children’s inheritance. A lifetime protection trust is a testamentary trust that is a sub-trust of your revocable living trust that kicks in when you pass away.

How Will Your Children Receive Their Inheritance?

You can choose how your children will receive their inheritance. The two main choices are outright or in trust.

Young children cannot own assets until they become adults. In California, children become adults at age 18. For our clients with young children, we design their revocable living trusts to allow their children’s inheritance to be in trust, with a family member or trusted friend as trustee to manage the assets until the child is at least 18.

During our planning meeting, we will ask you what age you think your children would be capable and mature enough to manage their inheritance -  what age do you think you will no longer have to protect your children from themselves? The younger the children are, the more this is a guess. If you are optimistic, you may say age 18 or 21. If you are pessimistic, you may say age 40 or older. Most parents say age 25 or 28, thinking that after college and a few years of working in the real world and paying bills and taxes, their children will be up to the task. Until that magic age, the inheritance can be in trust with someone as trustee. 

But what happens at that magic age? If you choose age 25 (which is the age most of our clients choose), we can write your revocable living trust so that when each child is 25, his or her share will be distributed outright, or remain in trust.

Outright Distribution

If outright, there will be no protection for the inheritance from a divorce or a lawsuit against your child.

Assets Remain in Trust

If it remains in trust, which we call a “lifetime protection trust,” the trust assets will be significantly protected from divorce claims and lawsuits. At age 25, or whatever age you choose, your child can take over as trustee of her own trust. As trustee, she will have control over how to invest the assets and when to make distributions to herself. But here’s the best part: if the inherited assets remain in trust, your daughter’s divorcing spouse can’t get to them. And, if she is sued, in most cases the plaintiff can’t get to them. And if she has a solid marriage, the assets are also significantly protected from lawsuits filed against her husband. More on lifetime protection trusts here.

Conclusion

Most of our clients choose to use lifetime protection trusts. Their reasoning is if they are going to put in the effort to set up their revocable living trust estate plan so their family won’t have to go through probate, why not design the trust to significantly protect their children’s inheritance. Click here to learn how Clark Allison can help you with your estate planning.

 

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