Using Trusts to Protect Assets From Children's Spouses

Question:  How do I pass my estate to my children upon my death and exclude my children’s spouses?

Answer:  Any assets you leave outright to a beneficiary will pass as your beneficiary directs.  One cannot dictate what a beneficiary does with assets which are under the beneficiary’s unrestricted control.  If you wish to control the manner in which a beneficiary utilizes your assets, you must restrict the manner in which your estate is given to the beneficiary.

Trusts serve a variety of estate planning purposes.  Trusts are often used to permit a responsible person to serve as trustee to hold assets for the benefit of beneficiaries too young or inexperienced to manage assets on their own.  Trusts can also be used in a situation such as yours where you wish to control how assets pass to your adult children. 

Where assets are placed in trust for children and other beneficiaries, a trustee can use the trust funds to make distributions to the beneficiaries for a variety of reasons.  Common standards for trust distributions include a beneficiary’s health, education, support, reasonable comfort and maintenance.  The trust can be structured to hold the inherited assets for the balance of your children’s lifetimes.  Unlike what happens with an outright distribution, you as the trust creator or grantor can direct how the assets will pass upon the child’s death.  This will prevent the child from passing assets to the child’s spouse as the trust you create will direct how the assets pass, thereby permitting assets to pass to the child’s children (your grandchildren) or other

One quandary many parents face is selecting a trustee.  Using a third party trustee will usually provide the most protection as the child can only receive distributions from the trust as the third party trustee determines.  Absent special creditors such as child support claimants or taxing bodies, the trust structure generally prevents creditors from seizing a beneficiary’s trust assets while the assets are held in trust.  For those unwilling to completely place assets outside a child’s control, a child can be given the right to remove and appoint trustees thereby giving the child indirect control over trust assets.

You might also consider permitting your children to serve as trustees of their own trusts. While a child may seek to defeat the purposes of the trust arrangement by making discretionary distributions to himself or herself, the child, like any other trustee, has a fiduciary duty to all of the trust beneficiaries in exercising discretion regarding distributions. 

Regardless of who you select as trustee, you may wish to include in the trust instrument a power of appointment for your children which gives your children the right to redirect how assets in a child’s trust will pass, either during the child’s lifetime or upon the child’s death.  Granting a power of appointment provides your child with the right to take into account special circumstances involving the child’s children or other beneficiaries.  While in some cases it is desirable to permit a child’s spouse to be a potential future recipient of trust assets pursuant to a power of appointment, this would conflict with your objective.

There are a number of circumstances whereby trusts can be effective tools for children and other beneficiaries.  In addition to the benefit of controlling the ultimate disposition of assets, a trust arrangement provides meaningful creditor protection. Very few people who are knowledgeable about the use of trusts would choose to leave outright distributions to children and bypass the benefits trust arrangements offer.

 

The Tax Corner addresses various tax, estate, asset protection and other business matters.  Should you have any questions regarding the subject matter, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfnr.com.