PROTECTING A CHILD'S INHERITANCE USING A BENEFICIARY CONTROLLED TRUST

What Are Other Typical Distribution Techniques for Leaving

Assets to One’s Children? What Advantages Does an Irrevocable Beneficiary-Controlled Trust Provide Over Them?

Other than the increasingly popular Irrevocable Beneficiary-Controlled Trust, there are three other common distribution techniques used by parents to leave assets to their children.

1. Outright Distribution – This method provides for the automatic distribution of your assets to your child upon the death of the second parent. It can be accomplished through a will or trust. While children often appreciate their parent’s confidence in them, this method offers zero asset protection. Once the assets are passed along, they will typically be included in your children’s estate, making these assets subject to creditors, ex-spouses, and other predators. In most states, once these assets are passed it is considered too late for your children to create a trust to protect these assets from claims.
    
2. Irrevocable Mandatory Income & Support Trusts – This method involves parents establishing a trust for the income and support of the beneficiary. An independent trustee  is appointed and often instructed to distribute the income for health, education, maintenance, and support of the beneficiary. These trusts provide income support for the beneficiary throughout their life and protect your assets until they are distributed. However, mandatory distributions are not protected from your children’s creditors. This means that if your child has a right to income based on your instructions in the trust, your child’s creditors may also assert a claim to those funds, leaving your assets vulnerable.
    
3. Staggered Distributions From An Irrevocable Trust - This method involves appointing an independent trustee to distribute your assets according to a timeline established by you. You create the trust and name and independent trustee. However, instead of giving the trustee discretion to give the funds to the child when they believe necessary or when the child needs it for support, health, education, or other reasons, this type of trust involves strict instructions requiring the trustee to distribute the funds as indicated by you. This means that if you indicate in your trust that your child shall receive $50,000 upon graduation from college, your children’s’ creditors may assert a claim to that money once they graduate from college, since the beneficiary is entitled to that money.
    

The Irrevocable Beneficiary-Controlled Trust is beneficial because it protects all of your assets before they are distributed. It provides safeguards against creditors, while also entitling your beneficiary to reap the benefits of your assets without technically “owning” them. This trust has become an increasingly popular tool used by many individuals today in effective estate planning to ensure their assets go exactly to who they intend them to.

What Are the Downsides to An Irrevocable Beneficiary-Controlled Trust?

Irrevocable Beneficiary-Controlled Trusts have become increasingly popular for a reason. Simply put, they offer significant benefits and very little downside. It is important however, to be aware of the downsides, no matter how insignificant, when debating whether to create such a trust.

As previously mentioned, an Irrevocable Beneficiary-Controlled Trust protects assets from creditor claims as long as they remain in trust. One downside is that if the assets are distributed to the beneficiary, they will be considered part of the beneficiary’s estate and thus subject to claims. However, this is the case with all trusts, not just the Irrevocable Beneficiary-Controlled Trust. Furthermore, if the assets are passed to a separate trust in which the child is the sole trustee, the child must be careful not to resign as trustee unless an independent trustee is in place. Such action will subject the assets to vulnerability of claims. Finally, one must always be aware of fees associated with trusts, taxes, and strict compliance requirements.