Holding Assets in Trust for the Next Generation

Over the past few years, we have seen a dramatic increase in the number of clients interested in holding assets in trust for their children. This is a trend we are noticing across the board, regardless of the size of the estate. This is not due to younger generations' lack of financial savvy or level of sophistication, but more related to the housing market bubble's bursting, uncertainty in the stock market and the fifty percent divorce rate. Parents have shown an increased concern in insulating their children's inheritance from these more prevalent pitfalls. Particularly when the trust is self-trusteed by the child, the disadvantages of retaining assets in trust for the lifetime of the child are limited. However, there are three significant benefits to holding assets in trust for your children for their lifetime:

  1. Creditor Protection: A trust created for children becomes irrevocable at the Settlor's death and the assets in trust for the child should generally not be available to the children's individual creditors. To the extent that distributions from the trust are discretionary (not required), the assets will continue to benefit from creditor protection. (As creditor/debtor law is continuing to evolve and to the extent the state law of a child's residency differs, this protection is hard to quantify).
  2. Divorce: While couples do not usually go into marriage anticipating a divorce, it is still a possibility. In most states an inheritance is treated as a person's separate property (and non-marital). However, in many states a person can unintentionally co-mingle or transmute the character of non-marital inheritance into a marital asset. These transmuted assets would then be the subject matter of a divorce proceeding and create the potential that the asset (or a portion of it) may be awarded to an ex-spouse. A trust helps ensure that this property is segregated and not comingled or transmuted. Similarly, as with creditor's claims, discretionary distributions from a trust, will not be considered a 'marital' asset, and should not be considered income for purposes of spousal support or alimony.
  3. Estate Tax Savings: A trust can be drafted to keep assets from being included in their children's estates for estate tax purposes. Estate tax exemption amounts have increased over the past few years (currently the estate tax exemption is $5,450,000.00 per individual). In spite of the increased exemption, there continues to be uncertainty in the area. We continue to be unsure if the exemption amounts will be reduced in the future.

There are good reasons for holding assets in trust for your children for their lifetime. Whether this is something that is appropriate for your family is something that should be discussed with an estate planning attorney.

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