Getting an inheritance in trust may be the best way to get (or give) an inheritance. Let me explain.
Most clients want all or at least part of their estate to go to an individual such as a spouse, child, close family member or friend. Usually, the clients have no special concerns about how the named beneficiary will manage the inheritance. In such a situation, the client may say, “I just want the inheritance to go outright to the beneficiary, with no restrictions.”
However, is that really the “best” format? What if a few restrictions could yield significant protection for the inherited assets?
An option to strongly consider is having the inheritance go to the beneficiary in an Inherited Subtrust. During the beneficiary’s lifetime, the subtrust holds the assets for the benefit of the beneficiary, with distribution as needed to pay for the beneficiary’s health, education, maintenance and support expenses. Although the named beneficiary can manage the trust as the trustee of the subtrust, and receives trust assets as needed, the beneficiary does not own the assets when they are held by the subtrust, which provides significant protection from creditors.
The fact that the beneficiary of the subtrust is not the owner, and has never been the owner of the assets, is the key. While a creditor or divorcing spouse can attach (and take) what someone owns, it is much harder for a creditor to take the assets that are owned and managed in an inherited subtrust.
This method of leaving assets in a subtrust for beneficiaries can be a great way to leave an inheritance. The assets remain available to the beneficiary for their health, education, maintenance and support. The beneficiary can serve as their own trustee and, with certain limitations, can control the use and distribution of the assets. Also, the beneficiary can have the power to appoint the trust assets to the people or institutions the recipient wants to benefit upon the recipient’s death. Finally, and perhaps most significantly, as noted above, leaving inherited assets in a subtrust can help protect the assets from creditors.
The subtrust format has two principal inconveniences for the recipient. First, after the grantor dies, but only after the grantor dies, the assets received must always be titled in the name of the subtrust. Second, the subtrust must file its own separate income tax return. Again, the extra tax return is only filed after the death of the original person creating the general trust.
In conclusion, before just “giving the inheritance outright” to those you love, consider including a subtrust in your general trust. This relatively simple modification can make a huge difference and better protect the assets you are leaving for loved ones.
WITH A SATELLITE OFFICE NOW IN PANGUITCH. Jeffery J. McKenna is a local attorney serving clients in Utah, Nevada, and Arizona. He is a shareholder at the law firm of Barney McKenna and Olmstead. He is a founding member and former President of the Southern Utah Estate Planning Council. If you have questions regarding this article or if you have a topic you wish to have addressed in this column, you can call 435 628-1711.