Copyright 1996, Marc S. Weissman
Certified Specialist: Estate Planning, Trust and Probate Law
Certified by the California Board of Legal Specialization of The State Bar of California
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DYNASTY TRUST

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

Asset protection involves placing your assets beyond the reach of creditors, in a way that you still have use and control of the assets.

It is difficult to protect your assets from your creditors' claims. It can be done in certain circumstances, but it is usually expensive and cannot be done after a creditor's claim arises.

However, protecting gifts or inheritances you leave to children or other heirs is very easy, and is something which should be considered for anyone who may inherit a substantial amount. "Substantial" is a relative term; an inheritance should be protected for anyone inheriting anything more than $100,000.

Standard Living Trust Distribution

Using myself as an example, my Living Trust formerly provided that all assets left (after my wife and I pass away) shall be left equally to my children (I have two daughters, age 4 and 2). Until they reach age 25, the assets will be held (in separate shares) with my sister, Laura, as manager. Until each child reaches age 25, Laura will manage the inheritance and spend whatever Laura thinks each child needs (from each child's separate share) for that child's health, education, and support.

As each child reaches age 25, the Trust ends and each owns her inheritance outright.

Once each child owns her inheritance, it is hers, and is subject to claims by her creditors.

Also, my future son-in-law might assert a community property claim against my daughter's inheritance.

[His community property claim might be valid or not, depending on my daughter's actions after receiving her inheritance - however, I prefer to eliminate my son-in-law's ability to assert any claim under any circumstance. (Rebecca is only 4 years old, but I don't like him already.)]

Revised Perpetual / Dynasty Trust

To provide protection for inheritances to my daughters, I have made a simple change to my Trust. Rather than giving each daughter ownership of her own share at the age 25, I have kept everything in Trust subject to the same rules (the manager may spend anything needed for the child's health, education, and support). The difference is that when each child reaches age 25, she is her own manager.

Specifically, under the new plan, after my wife and I both die, Laura is in charge until each child reaches age 25; thereafter, Rebecca will be sole Trustee for Rebecca's 50% share (and Jessica, on reaching age 25 will be the manager for Jessica's half). Each child will determine how to invest her own inheritance and when to spend money for whatever purposes she deems appropriate. I have also allowed each to spend money for the health, education, and support of any their children (my as yet unborn grandchildren).

This means that Rebecca will not be the owner of her inheritance.

If she (or her husband) is sued for any reason, the assets in the Trust do not belong to Rebecca, and cannot be seized by her creditors.
If she gets divorced, her husband cannot claim community property rights over the Trust.
When she dies (remember, the Trust goes on for a long time, unless she spends it all), anything remaining goes to MY grandchildren, NOT to Rebecca's husband.
When Rebecca dies, there is no death tax, regardless of how much she and her husband own. [This assumes that we leave our children less than $2,000,000 - more than that amount and it gets a little more complicated with Generation Skipping.]

However, as her own Trustee, she can spend whatever she thinks she should, for herself or for her children and at her death any remaining assets go to her children (in Trust).

If she and her husband want to buy a house, the Trust is authorized to invest in real estate, or loan them a downpayment. She has tremendous flexibility, but not ownership.

Unfortunately, it is not as easy to establish a similar Trust for yourself. However, this is an easy way to provide protection for your children or other heirs without too much cost, whether they are age 3 or 55.

There are several imperfections of this plan.

Every year, an extra income tax return and minor additional bookkeeping chores are necessary.
If Rebecca is sued and a creditor gets a court order, although the creditor cannot reach into the Trust and take out assets, the creditor can intercept any payments out of the Trust to Rebecca (but not to other beneficiaries). This means that Rebecca cannot get anything out, but her children can, with Rebecca's permission.
Rebecca can spend everything on herself and her family, and no one is in a position to stop her.

This is another reason to have a Living Trust.

It is also an excellent way to make lifetime gifts.

See an article about the benefits of a Dynasty Trust: Heir's View.

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