Inheritance Protection Plans
Thoughtful planning may create a lasting legacy.
There are three primary methods for distributing an inheritance:
- Outright. The simplest approach is to give the heir full control of the inheritance, without restrictions. For heirs with sufficient financial maturity and investment savvy, this may be appropriate.
- General needs trust. Trust planning comes immediately to mind when planning for a surviving spouse or an heir who is a minor. With a trust one, gets professional investment management guided by fiduciary principles. For young beneficiaries, a trust can provide for education funding, and for getting a good financial start in life.
But what about when the children are fully grown, established in their careers and financially mature, in their 30s or even 40s? Even then, trust-based planning will be an excellent idea for many affluent families. With a thoughtfully planned trust, wealth may be conserved and deployed on a long-term basis for the benefit of heirs.
- Special needs or supplemental needs trust. This type of trust may be considered for an heir who has disabilities resulting in qualification for government benefits. The trust must be carefully crafted to meet legal requirements so as to not impair or replace that government support.
Trusts in action
Among the key benefits that can be built into a trust-based wealth management plan:
Professional investment management. A significant securities portfolio is a wonderful thing to have, but it requires serious care and attention, especially when economic growth is uncertain; inflation is at a 40-year high; interest rates are rising; and taxes are uncertain. How can adequate income be provided to beneficiaries without putting capital at risk? What is the best balance between stocks and bonds? How can portfolio management be made more tax efficient? These types of questions will be addressed by corporate fiduciaries, such as us.
Creditor protection. One of the most frequent questions that we hear is, “How can I keep my money and property out of the hands of my son-in-law (or, sometimes, my daughter-in-law)?” The inquiry is understandable, given the high divorce rates in this country. Our answer: Use a trust to own and manage the property, and give your heir the beneficial interest in the trust instead of the property. A carefully designed trust plan can protect assets in divorce proceedings, as well as protect assets from improvident financial decisions by inexperienced beneficiaries.
Future flexibility. Parents typically have a fuzzy definition for treating their children “equally.” As each child is unique, his or her needs may require financial support that is out of proportion to that of siblings. By utilizing a trust for wealth management, one may give a trustee a similar level of discretion, permitting “equal treatment” on something other than gross dollar terms. The trust document may identify the goals of the trust and provide standards for measuring how well the goals are being met for each of the beneficiaries.
Capital foundation. Federal estate taxes are slated to zoom in 2026 and later years, with the amount exempt from federal estate and gift tax cut roughly in half. A trust may provide a capital foundation that avoids successive imposition of transfer taxes, and thus keeps more hard-earned wealth in the family.
Surviving spouses, blended families
When the heir will be a surviving spouse, there are additional considerations. An outright distribution would be the simplest, if the spouse is comfortable with handling the asset management. If a trust will be created, there are four choices:
- The Traditional Marital Deduction Trust provides the spouse with all of its income paid at least annually, and the spouse must have the power to direct the assets at his or her death. The federal estate tax deduction for this trust is unlimited, but the full value of the trust will be exposed to estate tax at the spouse’s death.
- The Qualified Terminable Interest Property Trust, sometimes referred to as a QTIP Trust, also provides all its income to the surviving spouse, but with this trust the rights to the remainder of the trust assets are fixed when the trust is created. This approach is typically used when there are children from an earlier marriage who will inherit the remainder. The marital deduction is allowed on an elective basis for the QTIP Trust.
- The Credit Shelter Trust may be sufficient for estates smaller than the federal estate tax exemption equivalent ($12.92 million in 2023). This trust will avoid federal estate tax at the first death, and will not be included in the taxable estate of the surviving spouse. Because the marital deduction will not be claimed, the trustee may be given broader discretion on the distribution of income and principal.
- A Qualified Domestic Trust is required to secure the marital deduction for a spouse who is not a U.S. citizen. The terms are parallel to the QTIP trust, but there must be a U.S. trustee.
Your estate planning advisor can fill in more details.
© 2023 M.A. Co. All rights reserved.
Some information provided in the Knowledge Center may be obtained from outside sources believed to be reliable, but no representation is made as to its accuracy or completeness. This information is intended for discussion purposes only and should not be considered a recommendation. The information contained herein does not constitute legal, tax or investment advice by Country Club Trust Company. For legal, tax or investment advice, the services of a competent professional person or professional organization should be sought. Trust services and investments are not FDIC insured, are not guaranteed by the Trust Company or any Trust Company affiliate, and may lose value. Past performance is no guarantee of future results.