How to Plan for Your Future and Protect Your Assets

with a Living “Dynasty” Trust

Most people who stay organized have at one time or another set up some kind of estate plan, perhaps coupled with a financial plan for their future and eventually their post-retirement years.  Most have some desire to leave a legacy for their children or other descendants and wish the process to be as painless as possible after they go.

Commonly, a will is used to express one’s desires for one’s wealth after death.  A will is the most basic way to put on paper those desires and provide an enforceable instrument so that those desires are not frustrated.  Absent a will, the State of Colorado has one built in for everyone who dies without a will, called intestacy.  Regardless of its efficacy, a will alone does have its downsides as will be discussed below.  For many, a better way to go is to use a living trust.

What is a living trust?

A living trust is the simplest way to give you peace of mind about how your legacy will pass on after your death and to minimize stress for those loved ones whom you desire to benefit.  In a living trust, you can decide how your assets are to be distributed upon your death and maintain a measure of control over those assets should you be incapacitated.

What does a living trust do that a will does not?

While certainly better than not planning at all, a will might not be the best way to accomplish the goals you have for your legacy.  The basic problem with wills is that for them to accomplish anything, they must first be validated by a judge through a process called probate, a public, time-consuming, and costly process.

In a probate proceeding, the court checks to see whether your will is valid (and hears any objections to its provisions from any interested party).  The court also sees that your debts are paid off to any creditors and that your assets go to who you say they should.  In the end, because it is the court system, the process is longer than it could be, is public and robs your family of privacy, and can cost thousands.

The other issue is that a will becomes effective with one event and one event only: your death.  If you were to become physically or mentally incapacitated, it provides no real guidance as to what will happen to your assets.  Absent such instruction, a court could conceivably be put in a position where it deems it prudent to take control of those assets before you die.

How does a living trust work?

Structuring the trust

A living trust operates somewhat like a business.  It becomes an entity unto itself and works by transferring your assets from your name into the name of your trust.  You maintain control of the trust by designating who is to be the trustee and providing direction to that individual.  In a living trust, you typically designate yourself as trustee, perhaps jointly with a spouse or other loved one.

Your assets are protected with your death in a few ways.  First, legally you no longer own the assets that are in your trust.  Your trust does.  So there is nothing for the court to interfere with should you die or become incapacitated.  Those assets are not subject to any probate proceeding.  You may still choose to have a will and there are certain things that can only be handled properly through a will such as guardianship of minor children.  While that will must still pass through the probate process, your assets are not subject to that process.

Second, you appoint a successor trustee who will manage the assets in your trust upon your death or incapacity.  You still guide that person by creating in the trust language instructions as to how the assets are to be distributed.  Who that trustee might appropriately be depends in part on the specific goals you have for your estate plan.  You may, for example, appoint your child as trustee of his or her own trust, but that may have certain repercussions for any asset protection plan you have in place.  In independent trustee is generally the most secure option, leaving your child (or any beneficiary) the power to replace an unsatisfactory trustee with another individual or professional.

Funding the trust

The next point is that the trust structure is only as useful as what is in it.  There must be assets transferred out of your name and into the name of the trust, or set up with your trust as a beneficiary, if you are to receive any of the benefits of this planning process.

The State allows you to have $50,000 in assets that will not be subject to probate proceedings.  So you can leave your basic checking and savings accounts just as they are and generally cars do not need to be retitled unless they are particularly valuable.

All other assets such as your house, stocks and bonds, mutual funds, CDs, etc. should all be retitled in the name of your trust.  This is something that you can do at your financial institution once your trust documentation is properly developed.

IRAs and 401(k)s require a special kind of attention and should not be transferred into your living trust while you are alive.  Ensuring that the proper kind of trust provisions is in place and that the right planning is done with those investments now can minimize the income tax burden that your children will faced when the time comes.

The trust governing your estate after death

A trust can be administered similar to a will, where each beneficiary received a share proportionate to how you desire.  However, a trust provides further benefits in that you maintain a measure of control over how those distributions are made.  The trust can be crafted in such a way that a relatively large lump sum does not find its way into the hands of children who might not know how to responsibly spend it.  Instructions can be included that certain requirements be met to qualify for the inheritance, that it be used for specific purpose, etc.  This has the added benefit of shielding the inheritance from any creditors that your beneficiaries might be dealing with, including lawsuits.

Conclusion

There are many benefits to a living trust over a will, some of which have been touched on above.  Discuss your options with an attorney at Shupe & Associates, P.C. in a free one-hour consultation.  You will leave that consultation with a review of your current plan and a recommendation for any modifications you might choose.

BASICS OF THE DYNASTY TRUST

INTRODUCTION

A common estate planning solution to protect assets during life and avoid probate in death is the creation of a living trust.  However convenient this solution may be, a trust must be carefully crafted to achieve the trust maker’s goals of ensuring the largest legacy possible for loved ones.  If not crafted carefully, a trust will not protect the inheritance from creditors, lawsuits, divorce, etc.

A well-prepared Dynasty Trust can achieve these goals and help ensure that the legacy that you spent your entire life building is not frittered away by poor decision-making or lost in accidents or due to circumstances beyond the control of your legacy.  The benefits of a Dynasty Trust include:

BENEFITS OF A DYNASTY TRUST

Joint Tenancy Protection

Beneficiaries, eager to put their inherited funds to work, often put their new assets into joint tenancy with their spouses.  This can be without thinking or with pressure from that spouse.  When all is well in a marriage, this creates little difficulty, but death or divorce can impact what your grandchildren get or do not get later on.

Leaving your children their inheritance in a Dynasty Trust keeps the assets in the bloodline and ensures that your desires regarding your grandchildren can be realized.  Dynasty Trust assets cannot be titled in joint tenancy with anyone other than your child, so when your child eventually moves on or in the case of a divorce, any remaining assets will pass only to your children or as you otherwise direct.

Divorce Protection

Dynasty Trusts protect your desires regarding your assets by placing those assets under the ownership of the trust, not your individual children.  So, trust assets cannot be held in joint tenancy or given directly in any way to your child’s spouse.  Otherwise, assets given to your child and placed in joint tenancy (commonly done), places your legacy in a position to be equitably divided by a divorce court judge should divorce occur.

Bloodline Protection

Dynasty Trusts ensure that your legacy remains in the family by instructing that any assets remaining at the death of your child pass only to your grandchildren.  If there are no grandchildren, those assets can pass as you otherwise instruct, ensuring that you decide where your legacy is to go.

Lawsuit Protection

Dynasty Trusts protect your assets from being lost should your children fall victim to a lawsuit, including accident cases, sexual harassment, etc.  If your child is sued and loses, his or her assets can be seized or attached by the plaintiff to fulfill the judgment.  Since assets held in a Dynasty Trust are not legally owned by your child, the funds are not available to satisfy a court judgment.

Creditor Protection

Dynasty Trusts prevent creditors from claiming the assets you desire for your children.  Your child cannot lose what your child does not own.  Your child cannot pledge the assets you leave him as collateral for a loan, and even if your child were forced to file for bankruptcy, your assets would be sheltered from loss.

Death Tax Protection

Dynasty Trusts, with certain exception, allow your assets to totally escape death taxes when your child dies and passes the remaining trust assets to your grandchildren.  If your children are independently wealthy in their own right, this is a particularly important benefit.

Bad Habits Protection

Dynasty Trusts are particularly beneficial if you are concerned about the spending habits of your children or worry that they will be financially irresponsible, overly generous, or prone to taking unreasonable business or investment risks.  The Dynasty Trust language can be crafted in such a way that if you have children who struggle with drugs, alcohol, gambling, etc. will find it difficult to access those funds to sustain their self-destructive behaviors.

Medicaid and Medical Expense Protection

Dynasty Trusts can protect your assets should a family member later need Medicaid.  New legislation makes it increasingly difficult to apply for Medicaid benefits, and your assets could disqualify a child, grandchild, or other beneficiary from accessing those benefits.  A properly crafted Dynasty Trust can help ensure that your assets do not complicate that family member’s access to Medicaid benefits down the road.

Income Tax Savings

Dynasty Trusts can purchase assets for your child’s use such as a residence or a business.  The IRS will not calculate as income the use or rent of trust-owned property.  So, your heirs will enjoy significant income tax savings for life.

Retirement

Dynasty Trusts can serve as a supplementary retirement benefit for your children’s secure retirement by setting aside funds for their use when they retired

HOW DOES A DYNASTY TRUST WORK

Choosing a Trustee for Your Dynasty Trust

Your child can serve as the trustee of his or her own Dynasty Trust, but with that certain asset protection benefits mentioned above may be weakened.  Depending on your child’s situation, you may find it prudent to name an independent trustee such as a bank or trust company, to act as trustee.  This may be worth thinking about particularly if you have children who are not financially savvy in any way.  You may even allow your child to decide who serves as his or her own independent trustee, who can be a close friend or other family member.

Clearly, an independent trustee is a key element to maximum asset protection and should be instructed to make decisions about how your assets are to be used in most situations.  You may involve responsible children as co-trustees to participate in things like investment decisions for the trust funds to both lessen the load for the independent trustee and involve your children in the process.

Another way to keep your children involved even if they are not actual trustees is to include in the trust language the ability for your children to replace an independent trustee who is acting inappropriately or unsatisfactorily.  In short, there are many ways to allocate the trustee powers, each with their pros and cons, and all of which can be clarified by your attorney.

Distributions Permitted as You Deem Appropriate

Dynasty Trusts allow you to maintain control over how your legacy is to be used.  You keep outside predators at bay while making determinations of how conservatively or liberally your assets are used.  You can ensure that funds are used for your children’s health, education, and general welfare.  You can provide funds for purchasing a new home, getting married, starting a new business, or even retirement.

While your children may initially balk at you providing such guidance, only irresponsible children need worry about trust-imposed restrictions on how the benefits are to be spent.