You’ve spent years building your wealth, and now you want to plan for your children’s future. The problem is that it’s impossible to predict what life holds in store, and there are a lot of mishaps that could reduce the wealth you plan to leave or eliminate it entirely. For example, what if your child:
- Gets into a car accident and an injured party sues them for significant damages?
- Marries and then divorces someone who tries to appropriate their money?
- Becomes mentally or physically incapacitated?
- Is simply not good with money?
Although Washington does not have an inheritance tax, estate taxes can also be an issue if you’re leaving a sizable inheritance. Depending on how much money is left after the exclusion amount is surpassed and applicable deductions are made, the rate of taxation can be 10 to 20%.
With certain asset protection strategies, it’s possible to protect their inheritance from these types of situations and ensure that your money does as you intended: bestow the financial security you want for them. This blog reviews the benefits of asset protection strategies like an irrevocable trust and how establishing a trust can help.
What is an Irrevocable Trust?
Whenever it comes to protecting your assets, you should use an irrevocable trust, which transfers ownership of property to the trust, limiting creditor’ access to those assets. All management and distribution is done by the named trustee, further separating beneficiaries from control of the contents. This specific type of trust cannot be revoked by changing its terms, nor can you or your child control its assets once it is established, although you can certainly benefit from them.
There are two types of irrevocable trusts: living and testamentary.
Living Trust
A living trust is created during the trustor’s (your) lifetime and the property it holds is not normally subject to probate. Such property is not subject to probate in Washington, so it does not need to be disclosed in court records, maintaining confidentiality.
Living trusts can result in tax savings for trustors under certain circumstances by taxing income to beneficiaries. It should be noted, however, that a trust established for a beneficiary under 14 may be taxed at his or her parent’s rate. Gift taxes may also apply to the transfer of property to a living trust.
Testamentary Trust
A testamentary trust is created as part of a will. Trusts of this kind are commonly used to protect, conserve, or transfer wealth after the death of their maker (the “decedent”). A Will specifies that part or all of the decedent’s estate will go to a trustee who is responsible for administering the trust property and making distributions to designated beneficiaries.
It is important to note that trust property normally passes through the decedent’s estate before transferring to the trust. Those assets will be subject to probate when the estate is probated. When you pass, they may also be subject to creditor claims and an estate and generation-skipping transfer tax.
Despite this drawback, a testamentary trust can be used to save for the future. For example, you can create one to provide for a child’s education or to delay the child’s receipt of property until they are older. Furthermore, property may be exempt from death taxation on the death of a trust beneficiary, although there may still be a generation-skipping transfer tax.
Despite their best efforts, most children require some form of asset protection against creditors, ex-spouses, and taxes. Fortunately, you can accomplish these goals through an irrevocable trust. A Seattle estate planning attorney can assist you in determining how to leave assets to your beneficiaries in a way that achieves your goals and protects your loved ones.
Questions? Speak to a Washington Estate Planning Lawyer
Asset protection trusts offer the best security against creditors, lawsuits, and judgments against your estate, preserving it as much as possible for the next generation. At Harbor Law Firm, we can help you structure an irrevocable living trust that gives you peace of mind about the future. To get started, contact us today via our website or at (888) 335-2815 to schedule your consultation.