A Florida Asset Protection Trust Is a Great Gift for an 18-Year-old that can be used for the rest of their life.
Almost every parent can remember the way he or she felt on the day their child turned 18. It’s the day their son or daughter takes their first steps into adulthood. Officially, they are no longer the baby you used to hold in your arms or the toddler that just learned to walk. They are adults living in the real world with all of its risks and rewards.
Parents know this mixture of feelings very well. They are excited for their child’s future but also nervous because they are still so young and apt to make mistakes. Many parents want to celebrate the child’s birthday by buying them a new car or sending them on a trip.
While these gifts are great, we often tell our clients the best gift you can give your child is an asset protection trust. A trust that can last the rest of the child’s life, which allows the parents to invest in the child, protect the investment from creditors, and allows the parent to retain some control over how the child uses the assets, after all, they are only 18 and most professionals would agree that young adults do not start making good decisions until at least 25.
In a few months my son will turn 18. One of the first things I will have him do is create a Florida Asset Protection Trust.
What is a Florida Asset Protection Trust?
A Florida Asset Protection Trust is a legal entity created by a person called the settlor and is managed by a person called the trustee. This legal entity is separate from the person that creates the trust, and it can hold assets, pay taxes, and can be sued or sue others much like a corporation. An irrevocable trust also has a beneficiary, which is a person that receives the benefit of the trust. The 18-year-old child would be the settlor, but the parent could serve as the trustee, and anyone other than the child would be the beneficiary of the trust.
A Florida Asset Protection Trust means the settlor cannot revoke or amend the trust once the settlor creates and transfers assets to the trust. At first, this seems like a negative quality to the irrevocable trust, however, this article will show how the settlor’s inability to revoke is a positive aspect of the trust. Further, an irrevocable trust can be designed by a Jacksonville estate planning attorney to allow for modifications under certain circumstances.
A revocable trust, which is also known as a living trust, is not seen as a separate legal entity from the settlor. A living trust is more commonly used to avoid probate. A revocable trust does not offer asset protection.
An irrevocable trust can provide asset protection for the beneficiaries of the trust when an estate planning attorney creates a trust with spendthrift and discretionary distribution provisions.
A spendthrift provision is a provision that prevents creditors of the beneficiary from taking trust assets to pay for the debts of the beneficiary. This provision also prevents the beneficiary from selling his or her interest in the irrevocable trust to a third party. Only the beneficiary can receive funds from the trust, and creditors may only attach to the funds once a trustee has distributed the assets to the beneficiary.
The discretionary provision in an irrevocable trust means the trustee gives funds to the beneficiary at the trustee’s discretion. The trustee refers to the language of the trust document and the settlor’s intent and then distributes the assets at his or her sole judgment. This is important because if the trust has mandatory payments, then a creditor can demand the trustee to make a regular payment.
Asset protection is important because this ensures the assets will always be there for the child no matter what mistakes he or she makes, or do to conditions that are out of the child’s control.
Control by the Child
While an Asset Protection Trust can considerably restrict a child’s ability to modify the trust the settlor can retain some control. For instance, the trust could still be irrevocable but allow the settlor a special testamentary power of appointment. This allows the settlor to change the listed beneficiaries of the trust, which is helpful if the child marries or has children later. This power also allows the child to change the percentages and dollar amounts beneficiaries that will receive distributions once the trust ends. The settlor or individual who is granted a power of appointment also can change the manner in which each beneficiary will inherit the assets.
Investing in your Children
When kids turn 18, they often ask their parents for new cars. At the time, nothing may make an 18-year-old happier than a shiny new red sports car. However, an irrevocable trust is a gift they will grow to love and appreciate more as they age. You and others can begin to transfer substantial assets to the child but not have to worry about loss from a divorce, creditor, car accident, or encouraging foolish behavior like dropping out of school.
Parents and any friend or family member can transfer funds into the irrevocable trust at any time after the trust has been created. A trustee will then invest these funds and create a stock portfolio for the child. The trustee has a duty to prudently invest the trust’s assets, or the child can hold the trustee liable. This means the trustee has a duty to diversify the trust assets, and the trustee has a duty to monitor the progress of the assets and their growth.
Another benefit of a Florida Asset Protection Trust is that it allows parents and others to give to the trust on a regular basis without facing gift and estate taxes. Currently, the United States allows a person to give up to $14,000 a year without paying a gift tax. This means over 20 years; one person can give $280,000 to a child without paying any gift tax or using their separate lifetime exemption. If you are married, you can gift $28,000 or $560,000 over twenty years. Right now a person can give $5.45 million over their lifetime, not including the yearly exempted amounts, to a person tax-free. This means that a parent can fund a child’s trust each year while not interfering with the parent’s separate estate plans. The assets in a Florida Asset Protection Trust are typically protected and exempt from creditors, scams, foolish investments, divorces, and loss from lawsuits.
Once the Florida Asset Protection Trust is created, you may want to update your will or other estate planning documents to direct funds left to your children, directly to the Asset Protection Trust. This can also help to protect inheritance.
For more information on why an irrevocable trust is the best gift you can give your child, contact The Law Office of David Goldman PLLC today at 904-685-1200.