Does a Living Trust Protect a Beneficiary's Inheritance?

A living trust can keep inheritance money safe.

A living trust is a common estate planning tool that, when used properly, can help protect a beneficiary's inheritance. The living trust can protect the inheritance from the beneficiary, the beneficiary's predators and from taxation, if used correctly. This type of estate planning requires careful construction of the living trust relationship in order to satisfy several very detailed state and federal laws.

Trust Explained

A living trust creates a fiduciary relationship for the ownership and management of property, including inheritance property for a beneficiary. A trustee, who administers the trust, retains legal title to all property held by the trust until the trustee disburses that property, according to the terms of the trust, to the beneficiary. The beneficiary's rights are limited by the terms of the trust agreement. The instructions in the trust agreement are therefore critical to protecting a beneficiary inheritance.

Spendthrift Trust

State laws allow for the creation of a specific type of trust, called a spendthrift trust, that protects an inheritance better than other types of trusts. A spendthrift trust is a trust in which the beneficiary has only limited rights to access the trust property. The spendthrift trust helps protect the trust property from the beneficiary and from any creditors of the beneficiary. Since the beneficiary does not have the right to take property from the trust, the beneficiary's creditors also do not have the right to take the trust property to satisfy the beneficiary's debts or judgments.

Tax Protection

A properly constructed living trust can also help protect inheritance from state and federal estate and inheritance taxes. Planning around state and federal estate and inheritance taxes is extremely complicated. Tax and estate planning professionals devote their entire careers to understanding these complicated rules. Generally, though, this type of planning is only necessary if the inheritance is worth more than $5,000,000, as of the date of publication.

Beneficiary Benchmarks

A living trust can also protect a beneficiary's inheritance from the beneficiary himself. The person creating the living trust can set certain benchmarks for when the trustee should distribute inheritance funds from the trust to the beneficiary. For example, the beneficiary may receive a distribution upon graduation from high school or college; upon completion of a service mission or military tour of duty; or perhaps upon the performance of some other requirement such as marriage or having children. For the most part, the person creating the living trust has total control over dictating when and how the beneficiary receives his inheritance from the trust over time. This can prevent a young, irresponsible beneficiary from receiving his inheritance too soon in life.

References

• "Estate Planning Basics"; Denis Clifford; 2010