A major concern for parents when creating an estate plan is “protecting” the inheritances that they are going to leave for their children. The things we are protecting against are numerous. Sometimes we try to protect the inheritances from potential creditors of the children or from the children themselves (in the case of a child who has a spending problem). Other times the protection is from divorcing spouses or to protect the receipt of government benefits.
The best way to achieve this “protection” is by setting up a trust. The terms of the trust will depend on the type of protection that we are trying to achieve. If we are trying to protect the inheritance from the child’s creditors or the child’s own reckless spending then typically a third party will be named trustee. The third party will dictate where and how and when the inheritances are spent. If the child has a creditor, if the trust is drafted correctly the creditors cannot go after the assets in the trust. Clearly naming a third party trustee would prevent the child from having their own access to the funds.
If a child is currently receiving or potentially going to receive government benefits in the future such as Medicaid or supplemental security income, receiving an inheritance can sometimes disqualify the child from receiving such benefits. A certain type of trust called a “special needs trust” can be set up to make sure that the trust assets do not affect eligibility for the receipt of government benefits.
Parents are always concerned that if their children get divorced, then the former spouses can get access and receive part of the inheritance. Again, a properly drafted trust can also avoid this situation.
The drawback with a trust is the more protection, the less control the child has over the money. A careful balance has be created so that the estate planning goals can be reached.