Family Protection Trusts: How to Keep Your Assets in Your Bloodline

There are many reasons to establish a trust in your estate planning documents. Historically, perhaps the primary reason to establish a trust was to avoid, or minimize, estate taxes. However, in recent years, the federal estate tax exemption amount has been increased time and again. For 2019, the exemption amount for an individual is $11,400,000 and the New Jersey estate tax was repealed, effective January 1, 2018. As the federal estate tax exemption continues to increase, there are still many important advantages to establishing a trust in your estate planning documents.

One of the most important reasons to establish a trust is to keep your assets in your bloodlines. Typically, parents want to leave their assets to children. Often parents specify in their estate planning documents that if a child predeceases them, such child’s share shall pass to their children (i.e., the testator’s grandchildren). Although individuals specify this disposition in their will, or other estate planning documents, their objectives may not be achieved. For example, if an adult child survives the testator/parent, absent a trust, he or she will receive their portion of the inheritance, outright. Once the child receives the inheritance, then his or her Last Will and Testament will control where the inherited assets pass upon the child’s death. Typically, an adult child will leave his or her assets to his or her spouse, if married. That ultimate disposition may be inconsistent with your estate planning objectives if your desire is to leave your assets to your grandchildren, rather than a daughter-in-law or son-in-law.

A great technique to ensure that assets pass ultimately to your grandchildren is to set up a trust for each of your children. The trust can be established irrespective of the ages of your children. Clients routinely consider trusts for their minor children, or where a child is a spendthrift. However, a Family Protection Trust can be set up in your estate planning documents for perfectly responsible adult children. These trusts run for each child’s lifetime benefit, and can be established in a will or a freestanding trust agreement, depending on the composition of assets.

The Trust terms can specify that the child is entitled to all of the income earned by the trust and whatever principal he or she needs from the trust for health, education, maintenance and support. Each child can even be the trustee of his/her respective trust share. The trust can specify that, upon the child’s death, any assets that remain in the trust pass in accordance with a “limited power of appointment,” to be exercised by each child in their own estate planning documents. If that limited power of appointment is not exercised, the assets can then be distributed directly to the child’s then living descendants. The use of a limited power of appointment allows a child to designate the ultimate beneficiary(ies) of the trust assets, while the parent can rest assured that the assets will remain in the family line.

These trusts, when structured and administered property, can also afford the children-trust beneficiaries creditor protection (even in the event of a divorce). Lastly, any appreciation that occurs in the trust from the date of your death until the date of your child’s death is also removed from your child’s estate for estate tax purposes.

If you are interested in learning more about Family Protection Trusts, contact us today or call our office at (856) 489-8388 to schedule a consultation.

inheritance, protection trust, wills
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