Beneficiary-Controlled Asset Protection Trusts

Much of elder law involves planning to protect seniors, their spouses, and their estates from exposure to long term care expenses.  However, many clients are just as concerned about how best to protect their legacy for future generations.  By including Beneficiary-Controlled Asset Protection Trusts in their own estate plans, parents and grandparents can proactively provide simple and cost-effective asset protection opportunities for their children and later generations.

Consider these common factors which often put an inheritance at risk:

Death of a Married Child:  Many parents choose to make a gift in their Will directly to a child or children.  But, if you choose to pass along your inheritance to adult children in a Beneficiary-Controlled Asset Protection Trust, you are ensuring the money can be accessed and used only by your children, grandchildren, or following generations.  Those who have married into the family do NOT have access to the funds (unless you choose to include the ability for your adult child to provide for a spouse upon their death).  Without a Beneficiary-Controlled Asset Protection Trust, when an adult child dies their estate plan may include outright gifts of the entire estate to their surviving spouse, who may then remarry.  Depending on your situation, you may desire additional protection for your estate in case the surviving spouse remarries or to ensure provisions for your grandchildren and future generations.

Divorce of a Married Child: Inheritances maintained in a Beneficiary-Controlled Asset Protection Trust are NOT subject to equitable distribution in the event of a child’s divorce. While inherited assets given outright to a child are also not subject to equitable distribution, the appreciation on those inherited assets will be.  Therefore, the Beneficiary-Controlled Asset Protection Trust provides an additional measure of asset protection as compared to an outright gift.

Bankruptcy or Creditor Protection: If a child has difficulties with bankruptcy or creditor issues, passing along your inheritance in a trust ensures creditors are NOT able to access these funds. Inherited assets given directly to a spendthrift child are likely to be dissipated rather than preserved.  However, if the child is able to serve as their own trustee, the Beneficiary-Controlled Asset Protection Trust contains provisions which allow for the trust to be managed by the adult child, while at the same time protecting the assets held in the trust from bankruptcy or creditor claims. Inheritance Taxes: In Pennsylvania, transferring wealth from parent to child at death results in the imposition of an inheritance tax of 4.5% of the net value of the estate. With a Beneficiary-Controlled Asset Protection Trust, when your adult child dies, there is NOT a second level of inheritance tax, even though the assets have likely appreciated to a much greater value.

Disability of a Family Member: As the adult child ages, it may be that the Beneficiary-Controlled Asset Protection Trust serves to insulate trust assets from long-term care expenses of the child. Your Beneficiary-Controlled Asset Protection Trust will be drafted with sophisticated provisions which modify the terms of the trust should your adult child become disabled.

Note: Adult children may have questions as to whether a trust is actually needed and what complexities will be involved if a trust is used. The modest administrative tasks associated with a Beneficiary-Controlled Asset Protection Trust include: 1) a trust must file annual income tax returns; 2) trust termination upon death of adult child (similar to estate administration required for child’s other assets); and 3) trust income tax planning which requires an annual review of trust income projections/distributions. When compared to the potential costs associated with divorce, bankruptcy, inheritance tax, and long-term-care expenses, these administrative tasks and costs are not only manageable but relatively insignificant.