Protect Your Beneficiaries With A Dynasty Trust

While it is often difficult to protect your own assets from creditor claims (in a future article I will discuss some methods of providing asset protection), it is relatively easy to protect any inheritances that you leave to children or other beneficiaries from creditors by creating what has become known as a “Dynasty Trust”. For this article, I will assume that your beneficiaries are your children, although the concept will work regardless of who you name as beneficiaries.

Most trusts provide that after the death of the settlors (those who established the trust) the assets are to be distributed to the children or held in a trust for the children until they reach a specified age, at which time the assets are then distributed. Once distributed, the assets then belong to the children and are subject to any claims by the children’s creditors. Such claims may come in the form of judgments, tax liens or even community property claims made by a spouse if the inheritance is not kept separate from other community assets.

In order to protect the assets from such claims, your assets can remain in a trust throughout your children’s lives and, rather than have the assets distributed to the children at a certain age, when they reach the specified age each child can become the trustee (manager) of their own trust.  As trustee of their own trust, each child can decide how to invest or spend their inheritance for themselves or for their children.

At this point, you are probably asking yourself, “So what’s the difference between this and simply giving them the assets?”

The difference is that by keeping the assets in a trust, the child is NOT the owner of the assets. Why is this so important? Because if the child is not considered the owner of the assets, if the child is sued or gets a divorce any assets that stay in the trust are protected even though the child has complete management control over the assets.

In addition to the asset protection feature of Dynasty Trusts, there are other potential advantages. When your child dies, because they do not own the assets, the assets in the trust will not be included in your child’s estate and, therefore, not subject to the estate tax (currently assets in the trust in excess of $1,000,000 would be subject to a “Generation Skipping Tax”).  The trust can also allow YOU to determine who gets any assets remaining in the trust (for example, your grandchildren and not the spouse) when your child dies.  These assets can then pass to those beneficiaries free of probate, regardless of whether your child had done any estate planning of their own.

Many parents fear that if they keep their assets in a trust after the children reach a certain age the children will resent them for trying to control their lives from the grave. However, a “Dynasty Trust” can be used to protect the children’s inheritance from creditors while, at the same time, allowing the children to have complete management control over the assets in the trust.

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This Article is designed to be of general interest and is not to be construed as legal advice.  Before acting on any matter contained referred to in this article, please consult with your personal legal adviser.