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According to the Department of Labor, inheritance historically accounts for up to half of total household wealth. Children’s inheritance can also help young people start new businesses or purchase their first homes. For many estate planners in Ohio, preserving this source of wealth is a key goal – and failure could prevent the next generation from reaching their full potential. One potential solution is a lifetime asset protection trust. In this blog post, we cover how a lifetime asset protection trust may help preserve your children’s inheritance.
High-net-worth families in Ohio strive to preserve their wealth through multiple generations – not just one or two. This goal is only possible with trusts that can last “in perpetuity,” but many states have strict laws on how long trusts can exist. As the Teachers Insurance and Annuity Association (TIAA) notes, some states have repealed these laws in recent years – and Ohio is among them. This makes “perpetual trusts” or “dynasty trusts” possible, and these estate planning tools can theoretically last forever while facilitating multigenerational wealth transfers. Ohio is one of 20 states that allow asset protection trusts.
In 2013, Ohio passed the Legacy Trust Act. This allowed estate planners in the state to create domestic asset protection trusts (DAPTs) for the first time. Prior to the passing of this law, only offshore trusts were possible – which were more complex and costly than DAPTs. After its passing, Cleveland State University highlighted various potential uses for DAPTs in Ohio. These include:
According to the Ohio Legacy Trust Act, a lifetime asset protection trust must meet various requirements. Each DAPT must have a qualified trustee, it must be irrevocable, and it must have a spendthrift provision. A qualified trustee cannot be the same person who creates the trust, and they must be an Ohio resident or regulated bank. Once someone creates an irrevocable trust, they cannot alter it – and this is an important aspect of an Ohio legacy trust. Spendthrift provisions help protect beneficiaries from creditors, which is often a key concern when preserving children’s inheritance. Finally, these trusts are “self-settled” – which means the person who creates the trust is also a beneficiary. Note that only a handful of other States aside from Ohio allow self-settled trusts.
A lifetime asset protection trust can potentially protect children’s inheritance in many ways. First, an Ohio Legacy Trust can provide some protection against the negative financial consequences of a divorce. A former spouse may struggle to “raid” the trust for child support or alimony – allowing children to access more wealth in the future. However, there are a few exceptions to consider – and families may wish to discuss these exceptions alongside Rhodium Law, LLC. When a grantor passes away, a lifetime asset protection trust can also shield assets from creditors – allowing more to pass into the hands of younger generations. Finally, a lifetime asset protection trust can help mitigate federal estate taxes for high-net-worth families.
As elderly individuals age, they may need significant medical treatments. A common concern is that creditors will take part of the family fortune to pay off medical debt and expenses – leaving little or nothing for the children’s inheritance. Once assets move into the Ohio legacy trust, however, creditors may struggle to access them when resolving medical debt. That being said, existing federal law means that the trust can only protect against non-Medicaid medical bills. In addition, estate planners must create their legacy trusts before incurring medical expenses for this strategy to be effective. Like all conversations about estate planning, legacy trust discussions should begin sooner rather than later.
An asset protection trust in Ohio can also remove assets from the family estate, reducing the on-paper federal estate tax liability as a result. Since assets in a trust are no longer “owned” by the person who creates the trust, they no longer factor into Internal Revenue Service estate tax calculations. This strategy involves using the federal gift tax exemption to move assets into the legacy trust.
If estate planners wish to take full advantage of this strategy, they may need to act quickly. Federal gift tax exemptions change over time, and they may suddenly reduce or “sunset” with the departure and arrival of certain political administrations. In addition, a taxable gift to the asset protection trust may be more suitable for certain estate planners. When a grantor pays taxes on this gift, it may be easier to access the funds during an unforeseen emergency at a later date. The estate planning aspects of a legacy trust are complex, and a discussion with a lawyer can shed further light on these details.
Although Ohio allows DAPTs, offshore or “foreign” asset protection trusts are still attractive for some estate planners. A trust in a foreign jurisdiction (such as the Cook Islands) is untouchable by United States authorities. In contrast, a DAPT could still be vulnerable to threats from the US legal system – including court orders, bankruptcies, judgments, liens, and various state laws in Ohio. The counterargument is that grantors have no legal recourse if a foreign jurisdiction decides to seize the trust. Foreign countries can experience sudden political and economic turmoil, and grantors cannot appeal to the US government for help with something outside of their jurisdiction.
Even experienced entrepreneurs and high-net-worth professionals may need help navigating the more complex aspects of estate planning. An experienced estate planning attorney in Ohio can help families choose the most appropriate options based on their unique needs. For some families, a lifetime asset protection trust can indeed protect children’s inheritance. However, online research may only provide limited guidance.
A consultation with Rhodium Law, LLC could prove to be a source of more personalized legal advice – so consider calling (216) 699-8145 to continue this discussion.
