Outright

When initially considering estate planning, many people want to leave their property to their loved ones outright, provided that at the time of the gift or bequest the desired recipient is capable of managing the property wisely.  

If the gift or bequest is large, an outright transfer fails to take into account estate tax savings, asset protection and divorce protection.  The family wealth could be lost in a generation to taxes, creditors or a spouse divorcing your descendant.

Trust

When assets are left to a beneficiary of a trust, the general rule is that the creator of the trust can dictate who may receive the beneficial enjoyment of the property and the extent and circumstances under which this enjoyment may be obtained.  As a result, trust assets will be protected from the beneficiary’s creditors and be saved from a second, third or fourth round of estate tax payments as the funds transfer through the generations.

But, to get this asset protection, the trust must be drafted in a very specific manner.

Staggered Distribution Trust

Some trusts allow mandatory distributions to the beneficiaries upon reaching certain ages.  For example, pay out one-third upon the beneficiary reaching age 25, one-half of the balance upon reaching age 30 and the balance upon reaching age 35.  This is commonly known as a Staggered Distribution Trust since the distributions are staggered over different time periods.  The philosophy used in this type of trust design is that the beneficiaries have multiple opportunities to learn from their mistakes.  However, if the assets are automatically distributed out of the trust at these staggered ages, they are also available to potential future creditors, divorcing spouses and subject to estate tax.

Many of the best estate planning attorneys around the country agree that a staggered distribution trust should never be used.  In our office, we rarely use these anymore.   

Dynasty Trust

A dynasty trust is an irrevocable trust that is protected from creditors and estate tax for as long as applicable state law allows. 

A dynasty trust can be drafted so that the beneficiary controls it, thereby allowing the beneficiary to enjoy the property in a manner as close to outright ownership as possible.  Even if the beneficiary is not old or mature enough to be in control at the time the trust is drafted, provisions can be added allowing the beneficiary to obtain control at a certain age or upon certain conditions being met.

Many of the best estate planning attorneys agree that a dynasty trust is the best tool for receiving a large inheritance.  In our office, we create these for most of our clients.

Texas

Effective as of September 1, 2021, Texas state law allows a dynasty trust be stay in existence for up to 300 years.  This law makes Texas one of the best states in which to maintain a trust for asset protection, estate tax protection and divorce protection for the down-stream beneficiaries.

Testamentary v. Stand Alone

A testamentary trust is one that is built inside of another document, such as your will or living trust.  Within your will or living trust there will be an article that contains the dynasty trust(s).  Once you pass away, in order to view the terms of the dynasty trust, one will look through your will or living trust document.

A stand-alone trust is one that does just that—stands on its own.  It is not imbedded inside of a will or living trust.  Once you pass away, your will or living trust only contains one sentence/paragraph stating you want a portion of your estate to pass to the stand-alone trust.  Your heirs will not have to look through your estate plan to view the terms of their trust.