The Family Legacy Trust: Creditor Proofing Assets for Future Generations

Stewart H. Welch, III, CFP, AEP

The concentration of wealth in the United States is moving toward an apex as the parents of the 80 million baby boomers begin to pass away and leave their wealth to their children. When this concentration of wealth is combined with the current litigation crisis in the United States, the result is a great reason to consider advanced strategies for protecting the wealth intended for your heirs.

Most parents who have wills (unfortunately too many do not) direct that all of their estate passes outright to their adult children. If their children are minors, the will typically states that the estate assets be held in trust until the children reach the age of majority (age 21 in most states). At that time, the assets will pass outright to the children. This strategy, in effect, subjects the parent’s assets to many future liability risks. Those risks can come in many forms. First, it is fairly common today to be sued and, unfortunately, many people take the position today of “sue first and ask questions later.” Second, the divorce rate in the United States continues to hover around 50%. Literally half of all marriages end in divorce. Think of how distressing it would be to work hard all of your life, build up a nice estate, which you use to support your retirement years, leave the remainder of that estate to your children only to have much of it lost in a lawsuit or divorce. There has to be a better way.

FAMILY LEGACY TRUST

To address this situation, many people are now choosing to create a family legacy trust in their wills. Instead of leaving assets to their children outright, they create a trust that lasts the lifetime of their children and remains in trust for future generations of heirs. This trust has a number of key advantages:

The assets in the trust are not subject to the claims of creditors. If your child is sued, the plaintiff can receive your child’s assets but not the assets of the trust.

If your child divorces, the trust assets cannot be included as part of your child’s divisible assets.

By including special language in the trust document, your assets will not be subject to estate taxes upon your child’s death (subject to limitations).

During your child’s lifetime, he or she will receive all of the trust income and can have reasonable access to the principal of the trust as well. It is almost as if the child received the assets outright, but not quite.

There are downsides to setting up a family legacy trust. First, most children prefer to receive the money outright. It is only natural for them to want full control and most people think that lawsuits and divorce are events that happen to others, not them. But since it is your assets at stake, you need to decide if you think you should protect those assets from very real potential threats. Second, a trust does require administration and tax filings, all of which cost money. This price, however, is worth the peace of mind that comes with knowing that your hard-earned wealth will be preserved to provide a floor of financial security for future generations of heirs.

CONCLUSION

The family legacy trust is a complex document and the assistance of an attorney who specializes in estate law should be used to begin the process. One excellent source of information is The American College of Trust and Estate Counsel (www.actec.org) Consult your financial advisor before acting on this advice.

Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-onlywealth management services to affluent retirees and healthcare professionals throughout the United States. He has been recognized by Money, Worth, Mutual Funds Magazine, and Medical Economics as one of the top financial advisors in the country. Visit his Web Site www.welchgroup.com.