by Tim Borchers, Esq., EPLS, AEP^®

Learn by Example: How an Inheritance Trust™ Works

In our last blog post, we explained why creating an Inheritance Trust™ is the best way to protect your heirs from forces beyond their control. Here are a couple of examples to illustrate how the trust works.

Suppose your daughter inherits from you through an Inheritance TrustA trust created after the death of the Grantor for the benefit and protection of the inheritor (or created to receive lifetime gifts and inheritance from the Grantor). Read More, and she wishes to pay off her mortgage with the trust funds. As her own trustee, she’d have the authority to do that without even having to weigh the idea against the the terms of the trust.

However, if the house on which the mortgage was paid off was in joint name with a spouse, the payoff would effectively benefit both your daughter and her spouse equally. Ordinarily, that wouldn’t be an issue. There is nothing in the trust design to prohibit using the funds that way.

But there are several things for your child, or an independent trustee, to consider:

• The status, or potential future, of her marriage.
• Whether the current financial environment is a good one in which to pay off a mortgage (sometimes it makes more sense to carry a mortgage in order to free up resources for other purposes).
• Whether the trust funds might be used to pay the monthly mortgage payments.

In another instance, suppose your son wants to use Trust funds to help his own child through college. That’s fine! In most cases, he has the right to appoint trust assets to his own children, spouse or even to charity — thus sharing the trust funds.

In most circumstances, we think children in charge of the their own trusts are likely to use their funds wisely. Here’s why:

1. Assets held in trust are more likely to receive professional financial management and less likely to be lost to bad investment.
2. Most inheritors regard what they’ve received in trust as special and to be used for the long-term benefit of the family. Trust funds are usually reserved for health, education and the support of beneficiaries or family members in time of need.
3. When assets are held in trust and perceived as the heirloom legacy of previous generations, it’s more likely they’ll be passed down to subsequent generations or used for charitable purposes.

While an Inheritance TrustA trust created after the death of the Grantor for the benefit and protection of the inheritor (or created to receive lifetime gifts and inheritance from the Grantor). Read More may not be right for every family, it beats the alternatives, including the forfeiting of funds to creditors, predators and poor decision-making.