With the words “trust fund” often come thoughts of entitlement, wealth, inheritance or other characterizations associated with people or families perceived to be wealthy. In the past, trusts have been used for many reasons, but the most typical use has always been to avoid or minimize estate taxes and leave as much money to heirs as possible. Dynasty trusts have historically been no exception. These trusts have been used as an estate tax minimization tool for passing wealth down through generations, often benefiting the children, grandchildren, and even great-grandchildren of the trust creator while paying the least amount possible in estate taxes along the way. Very wealthy families have often set up these trusts to last for multiple generations, allowing the assets in the trust to grow free from estate taxes. However, Dynasty trusts and other types of trusts also provide benefits that are less publicized or less understood than the obvious benefit of estate tax minimization or avoidance, but these other benefits are often just as important.
In reality, trusts can provide many benefits to families and individuals who do not consider themselves to be wealthy by most standards. In today’s litigious society with growing lawsuits, increases in the frequency and number of divorces, and constant unknowns for what the future holds, trusts can be an effective tool for protecting assets for generations to come, even when those assets don’t amount to millions of dollars. One of the more important, yet less discussed, aspects of trusts is their ability to protect assets from creditors when properly structured. Most people don’t even know how their own children will handle inherited assets, much less how their grandchildren will. When assets are left to children or grandchildren outright, they own those assets, so the assets are subject to lawsuits, creditors, and even divorcing spouses in some cases. Dynasty trusts provide a way of giving children income for their lifetimes while protecting the assets from lawsuits, divorce, and even their own negligent spending habits.
Protecting Family Assets in Divorce
During times of economic uncertainty and financial difficulty, both the number of civil lawsuits and divorce rates have historically moved upward. Many people know that a personal lawsuit can put their assets in jeopardy, but few people understand the true ramifications of divorce when it comes to inherited assets. There is a common misconception that inherited assets are always protected in a divorce. The truth is that isn’t always the case. Any aggressive divorce attorney will go to great lengths to show that inherited assets may have been commingled with marital assets or used to support the marriage, and therefore should be divisible in divorce. But when assets are held in trust, it is very difficult and sometimes impossible for those assets to be reachable by divorcing spouses or plaintiffs in a lawsuit.
The baby boom generation and silent generation are estimated to pass tens of trillions of dollars down to younger generations. But if those transfers are not planned for properly, much of that inheritance could be squandered or lost through various mistakes made by younger generations. Dynasty trusts can allow the older generations to provide income to their children and grandchildren while protecting the inherited assets from a number of financial landmines.