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What Are The Benefits Of An Inheritor’s Trust?

It may not be your first thought to consider how bequeathing assets to your family might affect them when creating or revising your estate plan. But, it’s extremely important and should be considered. Why? Because when your heirs receive their inheritance, it becomes part of their own taxable estates. So, giving a loved one permission to create an inheritor’s trust can help avoid this outcome.

The Trust In Action
In a nutshell, an inheritor’s trust allows your loved one to receive the inheritance in trust, rather than as an outright gift or bequest. Thus, the assets are kept out of their own taxable estate. Having assets pass directly to a trust benefiting an heir not only protects the assets from being included in the heir’s taxable estate but also shields them from other creditor claims, including those arising from a lawsuit or a divorce.

Since the trust, rather than your family member, legally owns the inheritance and the trust isn’t funded by the heir, the inheritance is protected. The reason is because everything you gift or bequeath to the trust (including growth and income from the trust) is owned by the trust, and therefore can’t be treated as community property. An inheritor’s trust can’t replace a prenuptial or postnuptial agreement but it can provide a significant level of asset protection in the event of divorce.

With an inheritor’s trust, your heir also can  realize wealth building opportunities. If you fund an inheritor’s trust before you die, your loved one can use a portion of the money to, for example, start a new business. A prefunded inheritor’s trust also can  own the general partnership interest in a limited partnership or the voting interest in a limited liability company or corporation. If you decide to fund the trust now, your initial gift to the trust can be as little or as much as you like.

Talk To Your Heirs First
As you draft or revise your estate plan and consider who to pass your assets to, it’s a good idea to talk to family members first. Determine if they would accept the bequests and then inform them of their option of creating an inheritor’s trust. Contact our team to help determine whether an inheritor’s trust is right for your situation.

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