Protective Inheritance Trust


“Kids! What’s the matter with kids today?” This famous song from Bye, Bye Birdie! Tells the feelings of both love and frustration that parents have concerning their children. At Phelps LaClair, we have experienced the deep emotions that parents go through when they are considering leaving children an inheritance that will be a blessing and not a curse. You may not be able to protect them from mistakes and disappointment. But you can provide protection for their inheritance with a Protective Inheritance Trust (PIT).

What is a PIT?

A Protective Inheritance Trust is an estate planning strategy designed to protect an inheritance from falling into the wrong hands. There are two very familiar scenarios that could be avoided with a PIT.

  • Scenario #1— The parents leave their children a modest inheritance. One of the daughters puts her money into a joint account with her spouse. Over the years, she uses some of the money for buying a house and putting the kids through school, saving the bulk of it for retirement. Unfortunately, three years after the last child finishes college, they divorce. The court awards the ex-husband half of the remaining inheritance. Even though it was her money to begin with, by putting it into a joint account, it became community property, to which the husband was entitled half. Divorce is the #1 destroyer of an inheritance.
  • Scenario #2— A mother passes away, leaving an inheritance to her very responsible daughter. A few years later, the daughter has a business deal that goes badly. The business partner sues her in court for one million dollars. Even though the lawsuit is frivolous, the jury rules in favor of the plaintiff. Just like that, she loses her inheritance.

There are many ways a lawsuit can happen to you. Car accidents, homeowner or business claims, or government claims against you are only a few. You may not even be at fault, but you can be sued for everything you have. In the above cases, the parents did everything they could to leave an inheritance to their children. But when unforeseen situations, such as divorce or lawsuits happened to their kids after they were gone, circumstances caused the money to end up in the wrong hands. Why did this happen? It’s because the parents gave outright ownership of the assets in the trust to the children. A Protective Inheritance Trust is designed to protect the assets of the trust from unscrupulous or unfair attempts to gain control of them.

How it Works

A living trust gives full ownership of the inheritance to the beneficiaries. This exposes them to the claims of ex-spouses, creditors, lawsuits, government claims and estate taxes. However, a Protective Inheritance Trust technically owns the assets of the trust. If the beneficiaries are divorced, sued, go into bankruptcy, or otherwise have claims against them, their inheritance is safe because they don’t own it.

On the other hand, a PIT allows beneficiaries to be their own trustees and control the assets in the trust as if they did own them. They can manage investments and distributions, and they can direct where any leftover assets go when the beneficiary passes away. It is a best-of-both-worlds scenario.

Real-World Solutions

Wills, living trusts, living wills, and tax-saving strategies are only a small sample of what is available when it comes to estate planning. For a complete rundown relevant to your personal life goals, give us a call for a free, no-obligation consultation. Phelps LaClair (serving Chandler, Mesa, Phoenix, and Scottsdale) can design a custom estate plan that will help you achieve all of your goals and provide for the protection of the wealth you have worked so diligently to accumulate. After all, when you are leaving children an inheritance, you want it to be all it can be for their future happiness and success. We can help you get there.



Images used under creative commons license (Commerical Use) 07/26/2020  Photo by Jude Beck on Unsplash

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