A Heritage Trust (HT) can protect your family’s inheritance from creditors, spouses and future estate taxes. In a typical estate plan, you will leave a portion of your estate to your child with him or her receiving the assets either at the time of your death or at a future date (typically related to the child’s age). For example, your child may receive his or her inheritance in portions, at ages 30, 35 and 40.
A Heritage Trust is an alternative method for distributing assets for the benefit of your children and provides advantages over outright distributions to your beneficiaries.
In a HT, assets are placed in trust for your child (or for any other beneficiary) for his or her lifetime. Your child can be the trustee of the trust and handle all of the trust’s administration (including investments) with one exception. A Distribution Trustee will have sole authority to determine when and how distributions are to be made to your child, and your child will have no say as to whether distributions are to be made to him or her. Your child will have the right to remove and replace a Distribution Trustee, provided that the replacement is not, in general, a person related to him or her.
At your child’s death, the assets remaining in the trust will then continue to be held in trust for his or her children.
If your child has not reached the ages at which you want him or her to be in control of the assets, you would name a trustee (usually the same person as the trustee for your children in your family trust) to be in control of the assets until your child reaches the designated ages to receive the inheritance.
There are three primary benefits of establishing a HT for your child:
- The assets should pass, at the child’s death, to his or her descendants without being subject to death taxes. If the assets put in the HT for your child are worth $500,000 when you die and $4,000,000 when your child dies, the entire $4,000,000 can pass estate tax free to your grandchildren. This makes the HT a Generation-Skipping Tax Trust, discussed below.
- Assets in the HT should not be subject to your child’s creditors or a claim by a spouse (in a divorce). A person cannot gain protection from creditors by creating this type of trust to protect him or herself. By establishing a HT for a child, you can, in effect, create an estate plan for your child with respect to the assets inherited from you.
- If a child has a HT that owns the assets inherited from you, the child would not need to create a prenuptial agreement as to those assets because the child is not treated as owning the assets; rather, they are owned by the HT for the benefit of the child.