From a young age we learn that the best gift comes with no strings attached. Santa doesn’t put conditions on the Tonka truck he gives you on Christmas! However, in estate planning, giving your beneficiaries their inheritance with conditions gives them an additional gift that they cannot give themselves—asset protection.
A common practice in estate planning is for a grantor to leave assets to beneficiaries in trust. Instead of the ownership transferring directly to a beneficiary, assets are transferred to an irrevocable trust for the benefit of that beneficiary. A Trustee is appointed to serve as the fiduciary who has the responsibility to manage the assets for the sole benefit of the beneficiary. The Trustee is also tasked with distributing the assets when (1) set conditions are met, such as the beneficiary attains a certain age, or (2) the Trustee uses discretion to determine standards set by the grantor are met. Typically, those standards include all or one of the following: health, education, maintenance, support or best interests.
Example: Beneficiary sends a request to Trustee indicating they have a medical expense that their health insurance won’t cover as their deductible is not yet met. The Trustee reviews that expense in conjunction with the standard set by the grantor and determines that this request falls under the “health” standard set by the Grantor and either reimburses the beneficiary or pays the medical invoice directly to the provider.
When an outright transfer occurs, the asset becomes that of the beneficiary’s and holds no ties back to the grantor. In a transfer to a trust created by the grantor for the benefit of the beneficiary, the asset is not fully in the beneficiary’s control as a Trustee must determine the conditions set are met. That is where the second gift, asset protection, is given to a beneficiary.
It is important to note that at his or her death, a grantor can place assets into a trust for a beneficiary with no conditions— the beneficiary can demand a distribution for any purpose or reason. In this situation, no second gift of asset protection is given as there are no conditions which must be met before a distribution by the Trustee must be made.
