By the time one reaches the “senior citizen” years, he or she likely has saved a nest egg for retirement. And regardless of whether the nest egg is a modest $250,000 – or millions – nearly everyone desires to leave the nest egg to his or her spouse or children (both referred to interchangeably as the “heir”).
The opportunity to provide financially for one’s family after death is often the last act of care that is offered. However, unbeknownst to many, the nest egg – after passing into the heir’s hands – can be lost if the heir later experiences a divorce, is sued, or is taken advantage of by an unscrupulous “friend.”
Further, the nest egg – as a part of the heir’s estate at the heir’s later death – will be subject to any death taxes applicable to the heir’s own estate. Importantly, the federal estate tax exemption is scheduled to decrease to $1 million and the top tax rate will be 55%.
Such “predator” and “creditor” risks – as they are sometimes called – are created when the heir receives the inheritance outright, or “free and clear,” instead of in a protected format.
Although an heir having total freedom over an inheritance is a good thing – this “freedom” can come at a high price. Specifically, the inheritance will be at risk of loss to divorce and creditors during the heir’s life and subject to the estate tax system at the heir’s death.
And, somewhat surprisingly, the heir at risk to predators and creditors is not always the elderly widow or the stereotypical wayward child. Many times the heir at risk is the successful professional in a high risk occupation, such as a doctor, business owner or entrepreneur – or the heir in a strained marriage.
One important technique available to provide “nest egg” protection against these risks is the Lifetime Trust.
Under the trust law, an inheritance held in a Lifetime Trust affords the heir broad legal protection from predators and creditors. This is because the inheritance is technically owned by the Lifetime Trust and not by the heir.
Also, it is possible to protect assets of the Lifetime Trust, at least in part, from federal and state death taxes at the heir’s later death – so that at the heir’s death the Lifetime Trust passes tax-free to the heir’s children.
Example: Mr. Smith is a widower, has a $1 million estate and one child, John. John is a CPA, 45 years old, in his second marriage, and has 2 children from his first marriage. Mr. Smith is concerned for John because John’s marriage is “shaky” and his CPA practice puts him at risk for a lawsuit. Also, John now has his own estate tax concerns because his CPA practice has prospered.
In this case, Mr. Smith could revise his Will or Revocable Trust to direct that a Lifetime Trust be formed for John, at Mr. Smith’s death, to hold John’s $1 million inheritance.
The Lifetime Trust would designate John as the primary beneficiary (and possibly John’s children as beneficiaries too) and would provide that the trust funds may be used for housing, food, clothing, health care, transportation, education, and many other appropriate expenses. Further, John may be designated as a Trustee of his Lifetime Trust in order to give him broad control over the investments of the Trust.
And upon John’s death the Lifetime Trust would pass to John’s children or otherwise as Mr. Smith directed via the Lifetime Trust – and the Lifetime Trust assets would pass free of federal death taxes under current tax law.
Also, if Mr. Smith were married, his estate plan could first create a Lifetime Trust structure for his wife’s inheritance, with John’s Lifetime Trust being delayed until both Mr. and Mrs. Smith are deceased.
In summary, the Lifetime Trust is an excellent tool to reduce creditor, divorce and death tax concerns while positioning an inheritance to be available to provide for one’s heirs for the rest of their lives.
Plan for Your Future
The Law Office of Robert H. Eardley, P.A. was founded to provide a broad spectrum of personalized trusts and estates legal counsel to the greater Southwest Florida community. Our legal team has decades of experience as well as the highest professional ratings to bring you comprehensive legal services tailored to meet your unique needs. Contact our Naples office today.
Robert H. Eardley, Esq., is Board Certified by the Florida Bar as a Wills, Trusts and Estates specialist, holds a Master of Laws (LL.M.) degree in Estate Planning, and practices law in Naples. He may be reached by telephone at (239) 591-6776 or by visiting the firm’s website at www.swflorida-law.com/contact.