Preserving Your Children’s Inheritance Money With A Lifetime Asset Protection Trust
When you want to leave your children inheritance money, you likely consider various options for doing so. In doing so, you may have found a number of pros and cons to each option, with the drawbacks often outweighing any benefits. A lifetime asset protection trust (LAPT) may be the solution you have been seeking. The benefits of these trusts and how they can be used make them an excellent way to pass on a cash inheritance, as well as other assets. If you want to discuss whether an LAPT is right for your estate with a Florida trust attorney at Loughlin Law, P.A., call (561) 677-8384. We will book your consultation, review your estate, and determine how we may be able to assist you in ensuring your legacy gets passed to loved ones with the solutions that are most suitable for your needs.
What Is a Lifetime Asset Protection Trust?
A lifetime asset protection trust is also sometimes called a bloodline trust or an inheritance protection trust. These trusts are a specific type of trust designed to protect assets for beneficiaries (in this case, the parent or settlor’s children) throughout their lives. LAPTs can be beneficial whether the settlor’s children are minor children or are already adults. While many trusts offer protections for inheritance money, LAPTs offer specific protections and unique benefits.
Benefits of an LAPT for Protecting Inheritance Money
A lifetime asset protection trust can offer several significant benefits for both the parent and the child when protecting a child’s inheritance money. From protecting the assets from creditors to teaching children responsible spending, an LAPT can ensure that the inheritance someone leaves behind benefits multiple generations after they are gone.
Asset Protection
While all trusts offer some significant asset protection, LAPTs offer stronger asset protection with a spendthrift provision. FL Stat. § 736.0103 defines a spendthrift provision as a term of the trust that restrains voluntarily or involuntarily transferring the beneficiary’s interest in the trust’s assets. The assets are shielded from creditors and lawsuits against both the settlor and the beneficiaries because the assets are not owned by the settlor or the beneficiaries, but by the trust. This limits their ability to access the assets, restricting them from freely withdrawing or using the funds or transferring their interest in the assets. Therefore, while the settlor and beneficiaries may benefit from the assets, they do not own the assets for a creditor or the other party in a lawsuit to seize them.
Additionally, LAPTs provide protection from poor financial decisions as well as divorce. Due to the limited access to the assets, they cannot be squandered easily. Distributions can be made at specific milestones or ages or at the discretion of the trustee, increasing the possibility that the beneficiaries will use them more responsibly. In a divorce, the assets in an LAPT are owned by the trust, not the individual, so they are considered separate property and thus not subject to division. This reduces the risk that the child will lose all or part of their inheritance in a divorce.
Flexibility and Control
A lifetime asset protection trust also offers some flexibility and control. First, it allows the settlor to set specific distribution terms, such as mandatory distributions or conditions under which distributions should be made. At the same time, they can also allow the trustee discretion over distributions, allowing the trustee to make distributions beyond the ones outlined in the trust or to withhold distributions if the beneficiary is not making sound financial decisions.
This offers protection for generational wealth. By carefully balancing the control of distribution terms with the flexibility of trustee discretion, a parent can increase the odds that the inheritance money they are leaving to their child will benefit not only their child, but also their grandchildren and potentially even their great-grandchildren and beyond.
Benefits Specifically for the Children
While the asset protection, flexibility, and control can benefit both parent and child, an LAPT can also have some benefits specifically for the beneficiaries, whether the child is a minor or an adult. First and foremost, it can provide financial security for the child. This can be reassuring if the parent dies while the child is still a minor, ensuring that even if their guardian does not provide for them once they turn 18, they will still have a source of cash to take care of themselves from their inheritance money.
Next, it can incentivize responsible spending while offering guidance and support for investing and spending. The child can be encouraged to develop financial responsibility and make wise decisions with their inheritance, learning about investing, saving, researching purchases to find the best value, and other money management skills. They can also be made co-trustees, allowing them to take on more responsibility for managing the trust’s assets while under the guidance and support of the trustee.
Are LAPTs Revocable or Irrevocable?
There are two main categories of trusts: revocable and irrevocable. LAPTs and other trusts all fall into one of those categories. Understanding whether a particular trust is revocable or irrevocable can be essential, as the settlor’s intended purpose may not be met if they choose the wrong trust.
Revocable vs. Irrevocable
Revocable trusts can be changed or terminated at any time after they have been established. This means that if the settlor changes their mind about including a particular asset or beneficiary, or changes their mind completely about having a trust, they can modify or dissolve the trust. However, these trusts also do not offer the same protection against creditors and lawsuits because of the relative ease with which the assets can be used or the trust terminated.
Irrevocable trusts cannot be altered, modified, or revoked by the settlor once the trust is established and assets have been transferred. This means that the assets included, the beneficiaries named, and distribution terms are unchangeable, regardless of how circumstances may change. These trusts often take ownership of the assets, which means the settlor and the beneficiaries do not own the assets even though they benefit from them, which is why these types of trusts often offer stronger protection against creditors and lawsuits.
Lifetime Asset Protection Trusts Are Irrevocable
Lifetime asset protection trusts are irrevocable trusts. Their irrevocability is the key feature that provides the strong asset protection these trusts are designed to offer. LAPTs remove the assets from the settlor’s direct control and ownership without placing control and ownership in the beneficiaries’ hands. While this provides strong asset protection and helps to ensure that beneficiaries do not squander the assets, it also means that once established, the trust is set. If the settlor changes their mind, whether about an asset or a beneficiary, they cannot change it. This is why it is critical that individuals considering establishing an LAPT speak with a trust attorney at Loughlin Law, P.A., to ensure that an LAPT is the most appropriate trust for their family’s needs before establishing one.
Key Facts About Lifetime Asset Protection Trusts
While lifetime asset protection trusts have many benefits for protecting inheritance money for children, there are some key facts individuals should consider before establishing one. Individuals should remember that the best trust for them is the one that meets the needs and goals of their estate plan, which may not be the one that a friend or family member has established for their estate plan.
Settlor Can Have Some Control, But Cannot Be Trustee
Individuals establishing a trust to preserve their children’s inheritance money often want to retain some or all control over the trust and the assets it holds. They may wish to maintain this control because they want to make changes if their children do not meet specific standards, so they can change the assets in the trust, or for a variety of other reasons. However, if the individual establishes an LAPT, they should understand that while they may have some control over how the assets are managed through the trustee, they cannot directly control or revoke the trust after creation. In other words, they may be able to influence the trustee’s decisions, but they cannot force the trustee to take specific actions.
Additionally, individuals must be aware that they cannot be trustees if they are also beneficiaries. If they are the trustee and a beneficiary, the LAPT would be a self-settled trust, which Florida does not recognize. If an LAPT is established with the settlor as both trustee and beneficiary, Florida courts may not recognize the asset protection features of the trust, and creditors may be able to pursue and access the assets to satisfy the settlor’s debts.
Trustee Must Be Carefully Chosen
As with any trust, the trustee must be carefully chosen. Trustees should be trustworthy, responsible, and competent. FL Stat. § 736.0816 gives trustees an extensive list of powers, including selling or acquiring property for cash or credit at private or public sales and exercising the rights of an absolute owner for stocks and other securities. Therefore, it is essential that the settlor choose a trustee who will not only abide by the terms of the trust but will also make those and other decisions with the best interests of the beneficiaries in mind.
Seek Legal Advice to Establish the Trust
While many websites are promising to help people establish a legal trust, and there are no laws requiring individuals to consult with or hire legal counsel to establish a trust, it is strongly recommended that individuals speak with a trust attorney for guidance and assistance with establishing an LAPT or any trust. A trust attorney will ask questions, review and evaluate the estate, and keep the individual’s needs and goals in mind when deciding which trusts may be more suited to their estate plan. An attorney will recommend one or more trusts personalized to the assets the individual owns, the purposes they want the assets to serve within the trust, and the ultimate goals the settlor has, including protecting inheritance money for their children. Websites offering generic trust establishment cannot offer these services.
How an Estate Planning Attorney Can Assist You
Trusts are one way to protect a child’s inheritance, and a lifetime asset protection trust may be the ideal way to protect your child’s inheritance money from creditors, lawsuits, divorce, and more. However, depending on your specific needs and goals with your estate plan, another trust may also be beneficial. At Loughlin Law, P.A., we may review your estate plan, ask questions about the goals you have for leaving inheritances to your children and others, and offer advice regarding the most suitable options for achieving those goals with your estate. Call (561) 677-8384 to schedule your consultation and learn more about the right trust options for your estate.
