Beneficiary Controlled Trust May Be the Answer to Protecting Your Legacy
Life can be unpredictable. Divorce, bankruptcies, and lawsuits are unfortunate realities that can threaten an inheritance you’ve carefully planned to leave your loved ones. Fortunately, various trust structures exist to safeguard your legacy from these threats.
The Vulnerability of Direct Inheritance
When beneficiaries receive their inheritance outright in their own names, those assets become exposed to multiple risks. Creditors, lawsuits, and divorce proceedings can all jeopardize the inheritance. Additionally, a second round of estate taxes may occur when the heir eventually passes away. If the beneficiary receives means-tested government benefits, a direct inheritance could disqualify them from those benefits entirely.
Beneficiary Controlled Trusts as a Solution
A Beneficiary Controlled Trust offers protection while maintaining flexibility. When properly created and funded, the beneficiary may control, use, and enjoy their inheritance with less risk than outright ownership.
In this structure, the beneficiary can serve as the controlling trustee, providing them with nearly the same level of control they would have with outright ownership. They can make investment decisions, and assets—including real property and investment accounts—remain owned by the trust rather than personally.
Flexibility and Risk Management
A key advantage is the beneficiary’s ability to adjust their level of control if circumstances change. Should significant risks emerge, such as an impending contentious divorce, the primary beneficiary can resign as trustee and appoint a trusted family member or professional to assume that role.
Alternative Trust Options
Spendthrift Trusts serve beneficiaries who struggle with financial decisions or face pressure from untrustworthy individuals. A trustee controls when, how much, and how often the beneficiary receives distributions.
HEMS Trusts limit distributions to Health, Education, Maintenance, and Support expenses, primarily used for estate tax avoidance. However, some states permit certain creditors and divorcing spouses to access these assets.
Enhanced Asset Protection
For additional security, the primary beneficiary may appoint an independent trustee to make distribution decisions. This adds another protective layer. The beneficiary can minimize concerns about excessive trustee discretion by retaining the right to remove and replace the trustee. The independent trustee cannot be a related party or subordinate person.
Tax Considerations
Trust selection requires careful attention to tax implications. Your estate planning attorney should thoroughly review your goals, concerns, and unique circumstances to determine which trust structure best serves you and your family’s interests.
If you are interested in learning how a beneficiary controlled trust or other trust structures can protect your legacy, contact our office to schedule a consultation.
