What Is a Descendant's Trust?

By Beverly Bird

When you create a trust, you place your assets in it during your lifetime, transferring ownership into the name of the trust entity. At the time of your death, these assets normally pass from your trust to the beneficiaries named in your trust documents. If you're not comfortable with this arrangement and want to protect your assets posthumously, you can create a descendant’s trust instead. When you die, assets designated for a certain beneficiary transfer to another trust created specifically for him.

When you create a trust, you place your assets in it during your lifetime, transferring ownership into the name of the trust entity. At the time of your death, these assets normally pass from your trust to the beneficiaries named in your trust documents. If you're not comfortable with this arrangement and want to protect your assets posthumously, you can create a descendant’s trust instead. When you die, assets designated for a certain beneficiary transfer to another trust created specifically for him.

Trustees

If you create a revocable trust, you usually act as trustee during your lifetime -- you have the power to manage its assets and do with them as you like. When you create an irrevocable trust, you name another individual as trustee. You no longer have any control over the assets placed in it. If you create a descendant's trust so that your bequest rolls over into it when you die, you can name anyone as trustee. You can appoint its beneficiary as trustee or you can name someone else to manage it for him. In either case, your beneficiary descendant still has the use and enjoyment of the assets contained in the descendant's trust. If you named someone else as trustee, that individual can distribute trust money to your beneficiary in monthly increments or the trust can pay your beneficiary's living expenses on his behalf. Your beneficiary can manage the trust the same way.

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Provisions

If you name your beneficiary as sole trustee, he has the power to close the descendant’s trust and take the money in a windfall unless you include provisions in your trust documents to prevent it. You can name co-trustees so neither can act without the consent and cooperation of the other. You can also specify in your trust documents that your beneficiary does not have the power to terminate the trust. You can provide that principal assets transfer to other beneficiaries of your choice at his death and he cannot close the trust prior to that. If you do this, you’re assured of keeping your money and assets in the family. He can't bequeath the trust assets to someone of his own choosing at his death.

Divorce

Your descendant's inheritance is his separate property in the event of his death or divorce, whether it passes to him by trust or will. As long as he holds title to the inheritance in his own name, his spouse is not entitled to a share of it. However, it would be very easy for him to take a misstep and inadvertently commingle the inheritance, erasing its immunity from marital distribution. This might happen if he places his inheritance in an investment account then makes an additional deposit into the account from marital funds. If you transfer his inheritance into a descendant's trust instead of giving it to him outright, this can’t happen. It prevents inadvertent mistakes that would allow a portion of your assets to go to your descendant's ex-spouse. He doesn't have possession of the entirety of his inheritance to commingle it. He has only the incremental trust payments or subsistence.

Protection From Creditors

The structure of a descendant's trust also protects your beneficiary's inheritance from his creditors and money judgments against him. Just as the assets in the trust cannot become marital property as long as they remain in the trust and are not in your beneficiary’s control, his creditors cannot reach them either. Only the payments disbursed to him are legally his and only that portion is vulnerable to garnishment or seizure by third parties. However, you must usually assign another trustee or co-trustee to ensure this.

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Tax Benefits of Irrevocable Trust

References

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