Money left to children can disappear for a host of reasons, divorce, bankruptcy, litigation, or bad investments, just to name a few. One way to protect family money is to set up a “Family Protection Trust”. The following article explains how these trusts work.
Parents never stop worrying about their children. They are worried about more divorces, about whether for example, a daughter (who is struggling to raise her son on her own) will have enough money, whether a son’s business will flourish, or whether he may be sued by a client. They’re also worried about there being enough money for their grandchildren.
Whatever they leave their children in their estate could go up in smoke if bad luck strikes or poor decisions are made. This is even true in the case of money left to another son, the most successful of the children. While he may have sufficient funds to weather any bad luck, he’s likely to have a taxable estate. Money left to him could be subject to a hefty estate tax before it passes on to the grandchildren.
So what can you do to make sure that what you leave actually helps your children and grandchildren? The answer is a “Family Protection Trust”, also sometimes called a “Bloodline” or “Dynasty” trust. These are trusts that continue after the parents’ death through the life of the children and, if the grantor chooses, during the life of the grandchildren as well. The funds are left for the benefit of the children and grandchildren, but limits are placed on access to the trust funds. They’re there if needed, but cannot be spent down on a whim. This restriction provides the necessary protection.
Some of the benefits of a “Family Protection Trust” are as follows: Funds in “Family Protection Trusts” are protected from creditors in the event of bankruptcy. Plaintiffs in lawsuits cannot invade “Family Protection Trusts”. While everything is generally on the table in the event of divorce, a “Family Protection Trust” will be treated differently from property in the name of a divorcing spouse. An independent trustee can protect a trust beneficiary from bad choices, whether they are risky investments or foolhardy spending. While parents can’t protect their children from bad luck, they can create a cushion for them if it occurs. A “Family Protection Trust” can keep funds out of a child’s estate, so it passes to the grandchildren tax-free.
Issues, such as set up and administrative costs, beneficiaries who may object to not having complete control and access to their trust funds, choice of trustee, and distribution rules will have to be addressed. However, after you have set up “Family Protection Trusts” for your children, you can now be assured that what you’ve worked long and hard to accumulate will be there for your children over the long term. But do we stop worrying about them? No. That’s just what parents do. Be Educated! Be Proactive!