By Randall A. Denha, Esq.*
“While we trust our kids, we may not trust their environment”, is a commonly used phrase that I have in my practice. Put another way, it’s probably best that children not receive too much too fast by way of an inheritance for fear of it being foolishly spent, taken by a creditor or invested improperly. As a result of these real fears, I have seen a dramatic increase in the number of clients interested in holding assets in trust for their children. Regardless of someone’s level of wealth, this trend is on the rise. This is not due to younger generations’ lack of financial savvy or level of sophistication, but more related to the housing market bubble’s bursting, uncertainty in the stock market and the fifty percent plus divorce rate.
Parents have shown an increased concern in insulating their children’s inheritance from these more prevalent pitfalls. Particularly when the trust is self-trusteed by the child, the disadvantages of retaining assets in trust for the lifetime of the child are limited. However, there are three significant benefits to holding assets in trust for your children for their lifetime:
- Creditor Protection: A trust created for children becomes irrevocable at the Settlor’s death and the assets in trust for the child should generally not be available to the children’s individual creditors. To the extent that distributions from the trust are discretionary (not required), the assets will continue to benefit from creditor protection. Each state has its own separate laws on how they treat this and the law is slowly evolving.
- Divorce: While couples do not usually go into marriage anticipating a divorce, it is still a possibility. In most states an inheritance is treated as a person’s separate property (and non-marital). However, in many states a person can unintentionally co-mingle or transmute the character of non-marital inheritance into a marital asset. These transmuted assets would then be the subject matter of a divorce proceeding and create the potential that the asset (or a portion of it) may be awarded to an ex-spouse. A trust helps ensure that this property is segregated and not comingled or transmuted. Similarly, as with creditor’s claims, discretionary distributions from a trust, will not be considered a ‘marital’ asset, and should not be considered income for purposes of spousal support or alimony.
- Estate Tax Savings: A trust can be drafted to keep assets from being included in their children’s estates for estate tax purposes. Estate tax exemption amounts have increased over the past few years (currently the estate tax exemption is $5,450,000.00 per individual). In spite of the increased exemption, there continues to be uncertainty in the area. With an upcoming presidential election, this is an area that remains subject to further change.
There are good reasons for holding assets in trust for your children for their lifetime. Like Warren Buffet has once said when asked how about much he was going to give his children upon his death, “so much so they can do anything, but not so much that they do nothing.”
*RANDALL A. DENHA, J.D,, LL.M., principal and founder of the law firm of Denha & Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. Mr. Denha continues to be recognized as a “Super Lawyer” by Michigan Super Lawyers in the areas of Trusts and Estates Law; a “Top Lawyer” by D Business Magazine in the areas of Estate Planning and Tax Law; a Five Star Wealth Planning Professional; Michigan Top Lawyer; New York Times Top Attorney in Michigan and a Lawyer of Distinction in the areas of Estate and Tax Planning. Mr. Denha can be reached at 248-265-4100 or by email at rad@denhalaw.com
