When most advisors and their clients consider Estate Planning, they look "downstream" to future generations. They think about how to structure the Estate Plan so as to provide for children, grandchildren, and other younger beneficiaries. The perspective is always, "How can we benefit future generations?" While this is a key aspect of any Estate Planning, there is not enough focus on the reverse: "upstream" Estate Planning. Clients should also focus upon how gifts and inheritances they expect to receive should be structured in order to benefit themselves.
Basic Estate Planning usually involves creating a Living Trust for the purpose of avoiding conservatorship in the event of incapacity and avoiding probate upon death. There is no question that for the vast majority of clients, being able to avoid the cost, expense, frustration, and other hassles with conservatorship and probate is worth the legal fee in creating a Living Trust.
Traditionally, most attorneys and other advisors have not seen additional benefits of creating a Living Trust beyond avoiding conservatorship and probate. As a result, provided the beneficiaries are mature enough to manage their inheritances, most Living Trusts terminate upon the death of the client(s) and the beneficiaries receive their inheritances free of trust, in their own name(s). This is simple, straight-forward, easy-to-understand Estate Planning.
Recently, the trend among national experts in Estate Planning, especially in light of the plummeting economy and the resulting dramatic increase in litigation, is to keep inheritances in trust for beneficiaries. The reason is because when a Trust is created for the benefit of a third party, the Trust can provide so many more benefits than avoiding conservatorship and probate. A Trust can provide superior creditor protection for the third party beneficiary in the event of frivolous lawsuits or extraordinary health care bills. A Trust can also provide significant divorce protection and even additional Estate Tax protection for the third party beneficiary. If the beneficiary is mature, the beneficiary can even be in charge of his/her Trust share.
However, such protections are only effective if a Trust is created by someone else for the benefit of a third party: i.e., you cannot enjoy the same benefits if you try to create such a trust for yourself. With all this focus on protecting future generations, how can you provide yourself with these same benefits?
One answer is to ask your potential benefactors (parents, grandparents, etc.) to structure their Estate Planning in order to provide "in trust" inheritances rather than outright inheritances. Some benefactors don't want to dramatically alter the structure of their Estate Planning. In that case, clients can have their own attorneys draft a special kind of Trust designed to receive assets from third party benefactors, sometimes referred to as a "Heritage Trust." The Heritage Trust will have all of the protections necessary to allow the beneficiary to enjoy as much creditor protection, divorce protection, and Estate Tax protection as possible. The benefactors would simply be asked to sign the Heritage Trust and would be asked to make a slight modification to their Estate Planning to leave any inheritance to the Heritage Trust. Any lifetime gifting should also be made to a Heritage Trust in order to provide for the same protections.
The key is for clients and their advisors to be aware of the concept of "reverse" or "upstream" Estate Planning and for clients to ask their benefactors if they'd be willing to sign a Heritage Trust and make a slight modification to their Estate Planning. As a nationally recognized expert on the subject once said, "It is rare that a parent would say 'No' to a mature child who asks the parent to do this. The parents often say, 'Hmmm…It protects it from your spouse! Where do I sign up?'"