Asset Protection: Protecting Inheritances

By Greer Gibson Bacon, CFP®
In many years of professional practice, I’ve never met a physician who didn’t fear a malpractice lawsuit.  Most don’t result in an award to the plaintiff, but the potential for financial loss is stunning.  That said; litigious patients may be the least of your worries.  There’s the soon-to-be ex-spouse.  There’s the teenage driver who causes a wreck while texting.  There’s the mailman who’s been bitten by your dog.  You have plenty of potential creditors and it’s important to build asset protection into your financial plan.
Now, let’s consider the greatest wealth transfer in history.  In the coming years, baby boomers will inherit $12 trillion from their parents.  However, that pales compared to the $30 trillion boomers will leave to their children.  For most of us, it’s important to protect these assets for ourselves, our children and grandchildren.  
Properly drafted, testamentary trusts are a great way to protect family assets from creditors while providing many (but not all) advantages of outright ownership.  For example, you can be your own trustee.  You can receive all trust income.  You can receive trust principal, but only if limited by an ascertainable standard, like the MESH standard (maintenance, education, support and health).  Also, you can be granted a limited power-of-appointment to direct trust income or principal to someone else.
Here are two examples of how you might use testamentary trusts in your financial plan.  
  • If you’re a high net worth boomer and likely to receive an inheritance from your parents, ask them to leave it in trust naming you as “income beneficiary” and your children as “principal beneficiaries”.  In addition to creditor protection, this provides a valuable estate tax advantage.  This is because trust assets are excluded from your estate if you don’t have a general power-of-appointment.  It blows the estate tax advantage and creditor protection if you can give them to yourself at-will.   
  • If you’re a high net worth boomer and likely to leave an inheritance to your children, leave it in trust naming them as income beneficiaries and your grandchildren as principal beneficiaries.  Again, this provides creditor protection and potential estate tax advantages.  But, importantly, it assures family assets pass to your grandchildren should your child die and his surviving spouse remarry.  
Although these examples don’t provide for spouses, you can.  For example, your parents might grant you a limited power-of-appointment to direct trust income to your spouse for her lifetime if you die first.  Thereafter, trust principal passes to your children.  You can provide for multiple generations, too.  
For generations, ultra-wealthy families (think Rockefeller, Guggenheim and Morgan) have used these and similar strategies to protect their wealth from potential creditors and continual erosion by estate and gift taxes as it passes from generation-to-generation.  Fortunately, they can be used effectively by the rest of us, too.  
If you’d like to learn more about this and similar strategies, you should contact your estate planning professional.  If you don’t have one, try visiting the Spokane Estate Planning Council website at

This article first appeared in the July 2016 Spokane County Medical Society Magazine. The information referenced in the article is current as of date of publication.


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