Lifetime Inheritance Trusts

Everyone knows that the purpose of a last will and testament is to ensure that your assets go to the people and/or charities you want to receive them when you die. But does a will alone guarantee that this will happen? The answer is - not always.

Many people do not know that there are actually two different methods of providing for your heirs after your death. They are as follows:

(1) Outright Ownership of Assets - You may draft your will so that your assets go outright to your heirs. This means that your heirs actually take ownership of your assets following your death.

(2) Assets Left in Trust - You may leave your assets in trust for the benefit of your heirs. This means that the trust (not your heirs) owns the assets. A trustee manages the assets for the benefit of your heirs and distributes funds to them as needed.

A trust that is drafted as part of your will is called a testamentary trust. Such a trust takes effect only upon your death, and you retain complete control of your assets while you are living. A special type of testamentary trust is a lifetime inheritance trust. Such a trust may be drafted to last for the lifetimes of your primary beneficiaries and their children. Thus, it can ensure preservation of your estate for up to two generations beyond your lifetime. Its purpose may be to provide for the health, education, support, and maintenance of your heirs.

An interesting feature of a lifetime inheritance trust is that it can be drafted to allow a primary beneficiary to function as trustee. While some have questioned whether doing so will open the trust to claims by your beneficiary’s creditors, experience has shown that this is not a problem with properly drafted trusts containing appropriate spendthrift language.

The fact that the trust (rather than your heirs) will own your assets following your death can actually be a tremendous advantage for the following reasons:

(1) The trust insulates your estate against any personal injury claim or any wrongful death lawsuit filed against your heirs.

(2) The trust assets are protected in any divorce proceedings against your heirs. While it is true that an inheritance received outright (i.e., free of trust) is classified as “separate property,” any income generated thereafter is classified as “community property.” For this reason, the distinction between separate and community property can easily become blurred. And when the line of demarcation is unclear, courts typically rely on a presumption of community property. But assets comprising a lifetime inheritance trust are distinctly separate property. As such, they remain intact for use by your beneficiary even following a divorce.

So if you have concerns over who will actually benefit from your estate when you die, a lifetime inheritance trust can provide some peace of mind.

Wright Abshire, Attorneys, is available to assist you with lifetime inheritance trusts, last wills and testaments, supplemental needs trusts, Medicaid planning, public benefits, advance medical directives, living wills, and probate.