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Protecting a Child’s Inheritance

A number of our clients have expressed concern about protecting the inheritances of their children. Sometimes, they worry about the security of a child’s job and what will happen if he or she loses that job in a tough economy, cannot pay bills, and loses the inheritance to creditors. Other times, they worry about the influence sons or daughters-in-law have over their children, and what would happen if their child got divorced. Some parents wonder if their children are mature enough to handle an inheritance and if they can make sound, long-term decisions on their own. Fortunately, there are a number of ways for you to leave an inheritance to your children and protect that inheritance against threats such as these and more. In addition to their ability to avoid probate and minimize taxes, trusts are some of the most effective tools to protect your children’s inheritances. Here are a few examples.

Discretionary trusts.

With these types of trusts, the trustee has complete discretion to determine trust distributions and the beneficiary cannot demand distributions. The settlor of the trust can provide guidance about distributions and withhold distributions if a child is facing divorce, bankruptcy and/or personal problems that may impact his or her ability to manage the inheritance wisely. In addition, creditors cannot access trust assets.

Support trusts.

In the case of a support trust, the trustee is required to make distributions for health, education, support, or maintenance to the beneficiary if so desired by the beneficiary. Only certain creditors, known as “super creditors,” can access the trust assets. Examples include child support/alimony payments, claims for services that “protected, preserved or enhanced the beneficiary’s interest,” and state/federal government debts such as tax liens.

Spendthrift trusts.

These trusts prevent the beneficiary from voluntarily or involuntarily transferring his or interest in the trust and protect trust assets from most creditors, excluding the super creditors described above.

If you are concerned about protecting your children’s inheritance against threats posed by creditors, predators, or even their own poor decisions, we can structure your estate plan to provide the level of protection ideal for your particular situation.

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