Why it's necessary to consider using separate share trusts

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Brian Treacy

When developing an estate plan, it is paramount you understand how distributions work and what that means for your potential beneficiaries.

For example, a married couple has two children. One child adequately manages her assets, has a job, no financial issues. The other child, is an alcoholic or an addict, cannot keep a steady job, and is always in financial trouble. The first child would have no issues receiving a sum of money from an estate, whereas the second child would have some major issues.

For instance, if the second child is an alcoholic and received a sum of $10,000, how long would it take the second child to drink up the entire inheritance? Would he survive having that much money to spend on his addiction?

What if the second child had a judgment against him or owed creditors money? The inheritance would be gone as soon as he received it in order to settle the debts. Is that what the clients would want for their estate?

For most, the answer is no. The intention is for any inheritance to be used for the benefit of the child, not to settle debts or feed an addiction.

One prospective client made the comment, "I never expected to have to worry about my adult child inheriting my estate." One sure way to guarantee an inheritance is used for the benefit of a child is through a separate share trust. A separate share trust can be included in any revocable living trust plan or be drafted into your will.

If the separate share trusts are included in a revocable trust, they come into being after the grantors have passed. Instead of the trust being distributed outright, any designated share would be moved to the specified separate share trust and managed for the beneficiary.

Similarly, a separate trust included in a will comes into existence after the estate and will have been probated. Instead of an outright distribution, separate share trusts are created and managed for the beneficiary.

Separate share trusts mean assets are never transferred into the name of the beneficiary. By the assets remaining in trust, creditors cannot reach the assets to settle the beneficiaries' debts. If the beneficiary were to go through a divorce, the inheritance would not be a part of the marital estate.

If the beneficiary is struggling with addiction, a separate trust could specify an amount the beneficiary is allowed to receive along with parameters on how the inheritance is used.

The beauty of a separate share trust is that it can be tailored to specific issues and needs of the beneficiary. If the beneficiary were to receive an outright distribution, there is no control over how the inheritance is used.

This is the No. 1 reason why it is important to update your estate plan and talk to an experience estate planning attorney. Life happens. People's situations change, and it is vital that you make sure your estate plan is equipped to handle the circumstances of your beneficiaries.

Separate share trusts are an extremely useful tool to have in your estate planning toolbox.

Brian T. Treacy is an elder law and estate planning attorney with an office in Bluffton. hiltonheadelderlaw.com

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