Money Radio/Financial News Radio – November 25, 2015

The main discussion was on the powers a child can retain over a trust established by his parents and how to have it be beyond the reach of the child's creditors as well as fall outside estate tax inclusion when the child dies. To listen to the entire broadcast, click here.

In this example, the parent sets up a trust for the benefit of his child, and the trust will last the lifetime of the child and the child's children. Some powers the child can have over the trust while maintaining asset protection and still keeping the assets out of the child's estate for estate tax purposes include

1. Power to be his own trustee over the trust. This gives the child the power to invest the trust in assets such as a cabin, house, or other personal assets as well as the power to make distributions of income and principal to the child or the child's children.

2. The power to make distributions to himself or to other family members. Distributions do not need to be equal as to the beneficiaries and distributions of principal must be limited to the "health, education and support" of the beneficiary. He can also distribute all income to himself without any limitation.

3. The power to withdraw principal. This is a power you give the child as a beneficiary, not as a trustee. This power can "trump" the power of the trustee to make distribution and must be limited to an annual withdraw right equal to 5% of the value of the trust.

4. The power of appointment. This gives the child the power to appoint who will inherit the trust when the child dies. This is essentially the power to "Will" the trust to whomever the child desires upon his death. He can appoint the assets outright to people, or can appoint the trust to another trust for the benefit of people.

5. If the child is not the trustee, you can give the child the power to approve the investment decisions of the trustee.

There are bad powers that cause the trust to be reachable by the child's creditors and causes the trust to be included in his estate for estate tax purposes at death. These include

a. Power to amend or revoke the trust.

b. Power to be trustee and make distributions to beneficiaries that are not limited to "health, education, support and maintenance". Power to make distributions for "joy and happiness" will not work.

c. Powers of withdrawal that are not limited to 5% causes the trust to be included for estate tax purposes and causes the creditors to reach the amount that can be withdrawn.

d. Power to appoint the trust to yourself, or to your creditors, your estate or creditors of your estate.

Payment Portal

You are leaving the Quarles & Brady website and being directed to the bill presentment and paying service offered by a third party provider. If you do not wish to continue to the site, click Close or use the Back button on your web browser to return the Quarles & Brady website.