Scott Roberts, CPA, CLU
Director of Estate Planning

If I had to pick the most common area that is ripe for improvement in many of my clients’ estate plans, it would be the terms by which assets are left to children and other heirs. More often than not, documents direct assets to be left to heirs in trust only until they reach a certain age, frequently staggering the distribution over a period of years such as one third at age 25, one third at age 30 and the balance at age 35. For most people, such a distribution schedule is perfectly adequate because the amount of assets is not substantial. However, when the amounts to be divided and distributed among heirs are hundreds of thousands, millions, tens of millions or more, a different approach is recommended, the benefits of which include increased asset protection and potentially significant future estate tax savings.

Specifically, instead of directing the assets to be distributed outright at certain ages, consideration should be given to leaving the assets in trust for the entire lifetime of the beneficiary, and beyond. Then, at the ages when assets would otherwise be distributed outright, the beneficiary can be given some measure of control. For example, they can become co-trustee at a certain age and even sole trustee of their trust.

When directing that a beneficiary can become trustee of their own trust, it is important to limit the discretionary distributions to the “ascertainable standard” which allows for distributions for “health, education, maintenance and support.”  Following that language, and allocating the appropriate amount of the decedent’s generation-skipping transfer tax (GST) exemption, should prevent some or all of the corpus of the trust from being taxable in the beneficiary’s estate, potentially saving up to millions of dollars of estate taxes. Fortunately, the ascertainable standard is sufficiently broad to allow beneficiary/trustees the type of control and beneficial access that clients typically wish to give – funds to start a business, help with bills or buy a house, but not the ability to gamble it away in Las Vegas.

Lifetime trusts also provide asset protection for beneficiaries in the event of a lawsuit or divorce because, technically, the beneficiary does not “own” the assets, the trust does. This protection is arguably stronger if the beneficiary is not a co-trustee or sole trustee, although the Florida state statute concerning “spendthrift provisions” in trusts does protect a beneficiary’s interest.  In any case, it is safe to assume that assets in trust are better protected than those left outright to beneficiaries, and it decreases the chances that assets earned and accumulated are not lost to lawsuit or divorce by the beneficiary.

Given the significant potential benefits of asset protection and estate tax savings, the use of lifetime trusts for beneficiaries should be considered in all cases where the amounts bequeathed are more than nominal.

This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.  LPL Financial does not provide legal advice or services.