May 12, 2021

Trust Administration | Administrating a Trust with Separate Share

Attorney and Financial Advisor Chris Berry discuss how to Administer a Trust with Separate Share in this episode of Daily Wisdom!

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Episode Transcript

Trust Administration

When administrating a trust with separate share or legacy inheritance provisions, how does that work?

Welcome to Daily Wisdom. Please join our host, attorney and financial advisor Chris Berry.

With most of our trusts, there’s a trace of how we want to leave things to the next generation. Let’s say you have a trust, maybe a joint trust, you’re married, and you have two options on how you want to leave things to your beneficiaries. One option is just the pillowcase of money approach, where we leave things outright to the beneficiaries once they reach a certain age, whether it’s 25, or 30, or 35. This would also be the same thing as just naming them outright as beneficiaries. Once you pass away, they inherit the money. The problem with this is if there’s a divorce, a lawsuit, a creditor action, bankruptcy, all that money could be lost. If they pass away, all that money could go to an in-law, who we call an outlaw, who might remarry, versus going down to your grandchildren, or staying in the family or the bloodline.

So that’s where we have, and we call these Legacy Inheritance Trust Provisions, where instead of it outright, it could be held in trust where your one trust could split into separate shares for the number of beneficiaries, we could also call this a separate share trust, and each of your beneficiaries could be the trustees of their own separate shares, whatever they leave in trust would be protected. The income would come out to them, so they’d still pay personal income tax rates, but the advantage here is that whatever you leave to them is now protected from creditors, protected from divorces, and the money stays in the bloodline.

Asset Protection

So the question here was, how do we actually administer this? So think of it like this, let’s say mom and dad, they set up this trust, and now we have, let’s say, three beneficiaries. And let’s say we built in those provisions. So we said, okay, for each one of the beneficiaries we’ll give you the opportunity to have this asset protection, so whatever you inherit. So let’s say this is the Jim Smith trust. And then Jim passes away. What we’d have to do is first, for Jim’s trust, if we don’t already have one, get a certificate of trust naming the new trustee, which would be the successor trustee, the person who wraps up the affairs of the beneficiary, and then potentially get another tax ID. And then we pay off all the final expenses, and then once we’re ready to distribute, once we’ve paid everything off, then we need to look at splitting Jim’s trust into three separate shares, one share for each child. So we have child one, child two, and child three.

And so now we’d have this trust would be the Smith trust for the benefit of child one, and so now we would need a separate certificate of trust showing that child one is the trustee of the trust, and then we’d have a separate tax ID for that trust. So there are a couple of hoops to jump through, but the advantage of this is now, as long as they keep it in trust, it’s protected from the divorces, creditors, bankruptcies, et cetera. But let’s say child two wants the same thing, so now we have the Smith trust for the benefit of child two, and child two can manage the assets however they want to and it won’t affect child one.

But then let’s say child three says, you know what? I’m not really interested in the asset protection, because all we’re doing is giving them the opportunity to inherit this money. So child three could say, you know what? I don’t really want the trust, I’m just going to take the money outright and do whatever I want. Well, if we give the child the ability to do that, then they can go ahead and just be done with the trust, give up all the asset protection, maybe they want to spend the money, or do something else. So that’s how we set it up, typically, when we have adult children where we trust them to make good decisions, and so what we do is we give them the opportunity so that whatever they inherit from you, if anything, can be protected, but if they want to just take the money and run, they can do that too, assuming we give them the flexibility or option to do that. So that’s how you administer one of the separate share trust or legacy trusts.