On December 11, 2012

Trusts are great tools to protect your assests and there are a variety available for estate planners to use.  The statistics tell us that the average time from when an inheritance is received until it is gone is only about 18 months. Even when the recipients are mature, stable, and well-intentioned, a sudden influx of assets can trigger a number of new issues, many of which could be less than healthy for the inheritance. Even for the most stable heirs, life events happen which put assets at risk: divorce, unplanned major medical expenses, loss of employment, business reversals, or other financial disasters.

Fortunately, there is a way that you can leave an inheritance that has built-in asset protection.

The easiest way to understand how¬†these types of trusts work is to imagine an inheritance as a stack of $20 bills. If you give this directly to an heir, it will be intermixed with the heir’s other assets and could easily be subject to any problems that could affect the assets of that heir: divisions during divorce proceedings, subject to creditors’ claims, business deals gone sour, or being lost in bankruptcy proceedings. Instead, imagine putting the same amount of money in a metal lock box and giving the lockbox (and the key) to the heir. The heir can get in to the box and use the money as needed, but it is much more difficult, if not impossible, for others to take the money. This “lock-box” is called a GST trust. This can be created by a Will or a Revocable Living Trust.

GST stands for “Generation Skipping Transfer” and was originally designed to take advantage of the GSTT exemption each person has in addition to the estate tax exemption. A type of legally binding trust agreement in which the contributed assets are passed down to the grantor’s grandchildren, not the grantor’s children. Now, we routinely use this type of trust solely for the asset protection side effect. The generation to which the grantor’s children belong skips the opportunity to receive the assets in order to avoid the estate taxes that would apply if the assets were transferred to them.

Like seat belts, or air bags in a car, if only one heir needs this protection one time in their life, it was worth it.

Categories: Trusts

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