How to Leave a Financial Legacy for Your Heirs
If your long-term financial goals include leaving a financial legacy for your heirs, it’s important to take steps today to protect your assets for the next generation. A lifetime asset protection trust (LAPT) is one option that can allow you to both generate wealth and preserve assets for your children.
Benefits of an LAPT
There are several main benefits of establishing an LAPT, as detailed below.
Asset protection
Assets held within the trust are controlled by a designated trustee and aren’t considered your children’s assets. Because the assets aren’t owned directly by your children, they’re protected from the following:
- Divorce – An LAPT provides legal separation between marital property and the inheritance, which means the assets held within an LAPT typically aren’t subject to division in a divorce.
- Incapacity – Should your child become ill or incapacitated and unable to make financial decisions, the trust will continue to operate under the guidance of its designated trustee.
- Creditors – “Spendthrift” provisions within the trust allow you limit the beneficiary’s control over the trust’s assets. This means creditors aren’t able to access trust assets for repayment of debt. This can be especially helpful if you have a child who struggles with high debt.
Control and management
Your designated trustee will be responsible for managing assets held within the LAPT, guided by your specified trust provisions. This process helps ensure trust assets are managed in a responsible manner and distributed to your children according to your wishes.
Tax planning
Placing assets in an LAPT can help lower the taxable value of your estate and also keep assets out of your heir’s estates.
Flexibility
LAPTs allow you the flexibility to structure trust provisions according to your wishes. This means you can tailor the trust according to your children’s specific needs, challenges and family dynamics.
Distributions
In addition to the flexibility of structuring trust provisions, LAPTs also allow you to designate how, when and to whom distributions can be made. For example, you can specify that beneficiaries must reach a certain age, hit an education milestone or experience a particular life event before they’re eligible to receive distributions. This flexibility allows you to pass down your family values as well as your assets.
Important considerations
LAPTs aren’t for everyone. Before implementing this type of trust, it’s important to consider the following.
Complexity and cost
LAPTs can be complex and expensive to establish and maintain. The time and money may not be worth the effort for smaller estates.
Tax challenges
While LAPTs can offer significant tax advantages to your beneficiaries, they can also add tax planning and compliance complexities that could be more than you wish to handle.
Legally binding
Trust documents are legally binding and can be difficult and costly to modify should your circumstances or goals change over time.
Jurisdictional differences
The benefits and effectiveness of LAPTs can differ based on where you live. Some jurisdictions have more favorable trust laws than others.
