Protect Your Child’s Inheritance for Life: The Power of a Lifetime Asset Protection Trust

As a parent, you’re likely hoping to leave your children an inheritance. In fact, doing so may be one of the motivating factors driving your life’s work. But without proper precautions, the wealth you pass on is at serious risk of being lost or squandered by accident. In some instances, an inheritance can even wind up doing your kids more harm than good.

Creating a will or a revocable living trust offers some protection, but in most cases, you’ll be guided to distribute assets through your will or trust to your children at specific ages and stages, such as one-third at age 25, half the balance at 30, and the rest at 35.

If you’ve created estate planning documents, check to see if this is how your will or trust leaves assets to your children. If so, you may not have been told about another option that can give your children access, control, and airtight asset protection for whatever assets they inherit from you.

In our planning process, we always offer parents the option of creating a Lifetime Asset Protection Trust for your children’s inheritance. A Lifetime Asset Protection Trust safeguards an inheritance from loss due to common life events, such as divorce, serious illness, lawsuits, or even bankruptcy.

But that’s not all they do.

Indeed, the best part of these trusts is that they offer you—and your kids—the best of both worlds: airtight asset protection AND use and control of the inheritance. What’s more, you can even use the trust to incentivize your children to invest and grow their inheritance.

Contrary to what you might think, Lifetime Asset Protection Trusts are not just for the super wealthy. Indeed, these protective trusts are even more helpful if you’re leaving a relatively modest inheritance because they can be used to educate your children about how to grow your family wealth, instead of quickly blowing through it.

And without such guidance, most people blow through their inheritance very quickly. In fact, one study found that, on average, an inheritance is completely gone within about 5 years due to debt and poor investment decisions. Another study found that one-third of people who receive an inheritance actually had a negative savings account within just two years.

Not to mention, the smaller the inheritance, the more at risk it is of being wiped out by a single unfortunate event, such as a medical emergency.

Regardless of how much financial wealth you have (or don’t have), if you plan to leave your kids anything at all, you should do everything you can to make it more likely that they grow what’s left behind, instead of losing it. This way, your resources can have a truly beneficial effect on their lives—and even the lives of future generations.

A Lifetime Asset Protection Trust can achieve each of those goals and so much more.

Most lawyers will advise you to put the assets you’re leaving your kids in a revocable living trust—and this is the right move. But as mentioned earlier, most lawyers would structure the trust to distribute those assets outright to your children at certain ages or stages.

And suppose you’ve used an online do-it-yourself will or trust-preparation service like LegalZoom®, Rocket Lawyer®, or any of the newer options that are frequently coming online now. In that case, you will most likely be offered only two possibilities: outright distribution of the entire inheritance to your kids when you die, or partial distributions when they reach specific ages and stages as described above.

Either of those options leaves their inheritance—and your hard-earned and well-saved money—at risk. Indeed, once assets pass into your child’s name, all of the protection previously offered by your trust disappears.

For example, say your son racked up debt while in college, which can sometimes happen. If he were to receive one-third of his inheritance at age 25, creditors could take his inheritance if it were paid to him in an outright distribution.

The same thing would be true if your daughter gets a divorce after receiving her inheritance, only it would be her soon-to-be ex-spouse who would claim a right to the funds in a divorce settlement. And despite what you may have heard about an inheritance remaining separate property, once it’s in your child’s hands, outright and unprotected, those assets are at risk.

There’s just no way to foresee what the future has in store for your kids—these kinds of events happen to families every day. And that’s not even taking into consideration that your kids might simply blow through the money and spend it all on unnecessary luxuries.

Lifetime Asset Protection Trusts are specifically designed to prevent your hard-earned assets from being wiped out by such risks. And at the same time, your children will still be able to use and invest the funds held in trust as needed.

For example, even though the assets are held in trust, your kids would be able to invest those funds in things like stocks, a business, or real estate, provided they do so in the name of the trust. Plus, if your child needs to pull money out to pay for college, a new home, or medical bills, they can do that by asking a Trustee—who’s chosen by you to oversee the money—for a distribution.

Or, you may even allow your child to become the Sole Trustee at some point in the future, allowing him or her to make decisions about the trust’s management.

Obviously, creating a trust like this requires significant understanding of how to draft the trust properly, so don’t attempt to make one without our guidance. Lifetime Asset Protection Trusts offer additional benefits that can be used to teach your kids how to invest and grow their inheritance, so that the assets you leave behind can be passed on to their children and beyond.

Most trusts require the Trustee to distribute assets to beneficiaries in a structured way, such as at specific ages or stages. Other times, a Trustee is required to distribute assets only for particular purposes, such as for the beneficiary’s “health, education, maintenance, and support,” also known as the “HEMS” standard.

In contrast, a Lifetime Asset Protection Trust gives the Trustee complete discretion over whether to make distributions. The Trust leaves the decision of whether to release trust assets totally up to the Trustee. The Trustee has full authority to determine how and when the assets should be released based on the beneficiary’s needs and the circumstances going on in his or her life at the time.

For example, if your child were in the process of getting divorced or in the middle of a lawsuit, the Trustee would refuse to distribute any funds. Therefore, the Trust assets remain shielded from a future ex-spouse or a potential judgment creditor if your child is ordered to pay damages in a lawsuit.

What’s more, because the Trustee controls access to the inheritance, those assets are not only protected from outside threats like ex-spouses and creditors, but from your child’s own poor judgment, as well. For example, if your child develops a substance abuse or gambling problem, the Trustee could withhold distributions until he or she receives the appropriate treatment.

Given that distributions from a Lifetime Asset Protection Trust are 100% up to the Trustee, you may be concerned about the Trustee’s ability to know when to make distributions to your child and when to withhold them. Granting such power is vital for asset protection, but it also puts a lot of pressure on the Trustee, and you probably don’t want your named Trustee making these decisions in a vacuum.

To address this issue, you can write up guidelines for the Trustee, providing the Trustee with direction about how you’d like the trust assets to be used for your beneficiaries. This ensures the Trustee is aware of your values and wishes when making distributions, rather than simply guessing what you would’ve wanted, which often leads to problems down the road.

In fact, many of our clients add guidelines describing how they’d make distributions across up to 10 different scenarios. These scenarios might include buying a home, getting married, starting a business, and/or traveling. Some clients also choose to provide guidelines for how they would make investment decisions. This is something we can support you with if you decide to use a Lifetime Asset Protection Trust.

Beyond these benefits, a Lifetime Asset Protection Trust can also be set up to give your child hands-on experience in managing financial matters, such as investing, running a business, and charitable giving. And he or she will learn how to do these things with support from the Trustee you’ve chosen to guide them.

This is accomplished by adding provisions to the trust that allow your child to become a Co-Trustee at a predetermined age. Serving alongside the original Trustee, your child will have the opportunity to invest and manage the trust assets under the supervision and tutelage of a trusted mentor.

You can even allow your child to become the Sole Trustee later in life, once he or she has gained enough experience and is ready to take complete control. As Sole Trustee, your child can resign and be replaced by an independent trustee, if necessary, to continue asset protection.

Regardless of whether or not your child becomes Co-Trustee or Sole Trustee, a Lifetime Asset Protection Trust allows you to turn your child’s inheritance into a teaching tool.

Do you want to give your child the ability to leave trust assets to a surviving spouse or a charity upon their death? Or would you prefer that the assets be only distributed to his or her biological or adopted children? You might even want your child to create their own Lifetime Asset Protection Trust for their heirs.

We offer you a wide variety of options that can be tailored to fit your particular values and family dynamics.

Of course, Lifetime Asset Protection Trusts aren’t for everyone. If your kids are going to spend the vast majority of their inheritance on everyday expenses and consumables, they probably don’t make much sense. But if you want the assets you are leaving behind to be invested and grown over the long term, a Lifetime Asset Protection Trust can be immensely valuable.

Meet with us to see if a Lifetime Asset Protection Trust is the right option for your family. In the end, it’s not about how much you’re leaving your loved ones that matters. It’s about ensuring that what you do pass on is there when it’s needed most and put to the best use possible. Schedule a 15-minute Discovery Call today to learn more.

This article is a service of Ralston Law, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.