By Nancy Burner

With tax planning becoming less of an issue for the average client, the focus in estate planning has shifted to asset protection for intended beneficiaries. As attorneys, we often hear our clients tell us that they plan to leave everything equally to their children but that they are concerned that one (or more than one!) has creditor issues or are going through a divorce. How can they ensure that whatever they leave to this child will not have to be spent on his or her debts or given to his or her soon-to-be ex-spouse? The answer is with the use of a descendant’s trust.

Whether an estate plan includes a traditional last will and testament or a trust, planners should direct that any asset left to a child with potential creditors or divorces be left in a descendant’s trust, also commonly referred to as an inheritor’s trust. This is a trust written into the last will and testament or trust document that does not come into effect until after the death of the creator, which will protect the child’s inheritance from outside invaders, including creditors or divorcing spouses. To the extent that assets are left in the trust, creditors do not have access, and the assets are considered separate and apart from the marital estate.

Typically, the descendant’s trust provides that any income generated from an asset in the trust shall be paid to the beneficiary, and principal distributions can be made for health, education, maintenance and support if the child is his or her own trustee or for any reason if there is an independent trustee. An independent trustee is a person not related by blood or marriage to the beneficiary and is not subordinate to the beneficiary, i.e., does not work for the beneficiary.  However, your lawyer can customize the language to provide for you and your beneficiaries’ specific circumstances.

While a beneficiary can be his or her own trustee, if there is a concern about the child’s “questionable spending habits,” a trust creator can consider naming someone else to be trustee for him or her or naming a co-trustee to act with the child. This could be a sibling or another trusted individual.

It is important to remember that many assets are disposed of by beneficiary designation, such as retirement accounts and life insurance. This means that once you draft the descendant’s trust in your estate plan, you must designate the trust created for their benefit as the beneficiary for their share of your assets. This will ensure that the asset passes to their trust and not to them directly.

However, be cautious when designating a trust as the beneficiary of retirement assets. When an individual inherits a retirement account, he or she must begin taking minimum distributions according to his or her life expectancy, but the principal of the retirement account continues to grow tax deferred. When a trust is designated as a beneficiary, the IRS forces the account to be paid out over a five-year period since there is no individual on whom to calculate a life expectancy. In order to ensure that a trust can still get the “stretch-out” over the child’s life expectancy, there must be certain provisions included so that the trust can accept the retirement account. Accordingly, be sure to discuss any beneficiary designations with your estate planning attorney before executing same.

Whether your estate plan includes a simple will or a complicated trust-based plan, incorporating descendants trusts is an excellent way to safeguard assets for your intended beneficiaries.

Nancy Burner, Esq. has practiced elder law and estate planning for 25 years. The opinions of columnists are their own. They do not speak for the paper.