Protecting Your Child’s Inheritance With a Trust

Protecting the Inheritance of a Child, Spouse, and Beneficiaries You Love With a Trust

Thoughtful financial planning after death includes more than just successfully passing wealth on to loved ones in a manner that protects that wealth for him and/or her and (perhaps) future generations.  In a litigious society where the “have nots” want what the “haves” own, asset protection has emerged as one of the greatest concerns of successful people.  Parents are not only concerned about threats to their own wealth while they are alive, they are concerned about protecting their wealth for their descendants.  With divorce, bankruptcy rates, and lawsuits as high as they are, it is easy to understand why clients are concerned about the risk of assets passing to their children’s spouses, creditors, and predators.

Asset Protection trusts can be set up by parents and grandparents for their descendants. These Trusts can provide protection because the beneficiaries have no immediate rights to the funds in the trust if written correctly.

How to Protect Your Spouse and Children Through the Use of a Protective Trust

Here’s a Case Study:

At her death, mom had a trust in place in which she left her Estate outright to her son.  Mom expected that if something happened to her son, her estate would pass to her son’s only child (mom’s grandson) from his first marriage.  At the time of mom’s death, her son had recently married his second wife. What could happen to mom’s Estate now if her son dies without proper planning?

If her son co-mingles his inheritance with his second wife and they divorce, half of the assets could go to the second spouse instead of to her grandson.  If her son died without an estate plan, New Jersey’s intestate law controls.  By operation of law, the inheritance could be divided between his new wife and his son, with the grandson receiving his inheritance outright at age 18.

If mom’s son inherits mom’s estate outright after her death but before he dies and he has creditor problems, the entire inheritance could be lost to creditors.  However, if mom had created a trust to go to her descendants in a beneficiary-controlled trust, the assets could be protected from predators, a second spouse, and creditors.

Trusts Offer Four Levels of Protection

Take a look at the most common distribution techniques that parents and grandparents can adopt to leave their estates to their children, grandchildren and/or designated beneficiaries. Read the columns from left to right to better understand the subject matter.

There Are Four Distribution Techniques You Can Select to Leave Assets in Trust to Children or Other Beneficiaries: 
Each option has its benefits and disadvantages which I summarize for you.

Options for Distribution to Descendants Sample Language Advantages Disadvantages
Outright Distribution to Beneficiaries “After my death, my trustee shall distribute the trust assets to the beneficiary outright.” – Descendants appreciate their parent’s confidence in them. They receive the Trust assets all at once with no limitations – No asset protection here.
– Distributed funds from the trust are included in the descendant’s estate.-In most states, once your children and beneficiaries have inherited assets, it is too late for them to create their own protective trusts.
Income & Support Trusts “The income and principal of the trust shall be distributed in trust to the named beneficiary as is necessary for his/her health, education, maintenance, and/or support.” – Creditor protection features can be included in the trust. – Beneficiary does not have complete freedom to access the principal of the trust during its term.
Staggered Distributions from a Trust “After my death, my trustee shall distribute one-third of the trust assets to my beneficiary at age 25, one-half of the balance at 30, and the remainder at 35.” – Descendant’s appreciate the safeguards while they are young.
– Assets are protected while in trust.
– No asset protection for distributed assets as the child reaches 25, 30, & 35.
– Distributed assets are included in the descendant’s estate.
Discretionary Distributions from a Trust “After my death, my trustee may distribute to the beneficiary as much or none at all of the principal of the trust as my trustee may determine is advisable for any purpose.” – Descendants have the highest safeguards.
– Distributions of trust principal and income to children are subject to the complete trustee discretion.
– Asset protection of trust corpus and income while the trust exists.
– Assets retained in trust generally are not included in the descendant’s estate, if written correctly.
– There is the potential for trustee refusal to distribute any principal and interest to beneficiaries

Let’s take a look at the above-summarized trusts in greater detail so you can understand how each trust works.

Mandatory Income and Support Trusts. With this type of trust, the trustee is required to make income distributions to the named beneficiaries according to the terms of the trust.  Support trusts direct the trustee to distribute the trust’s principal and/or income for the health, education, maintenance, or support (HEMS) of the beneficiaries.  With these types of trusts, descendants do not have mandatory distribution rights.  If they do and beneficiaries have a demand right, creditors can “step into the shoes” of the beneficiary and demand distributions from the trust.  A support trust usually contains spendthrift language (spendthrift means creditor protection)that does not permit the beneficiary to assign future income or principal from the trust.  This is a very effective safeguard to protect a trust from creditors and predators and ex-spouses.

A Staggered Distribution Trust holds assets in trust for a person (child, grandchild, and often a niece, nephew, etc.).  Trust assets are distributed in staggered intervals when the person attains a certain age (such as 25, 30, and 35).  Staggered distributions are used to prevent a child or beneficiary from squandering the inheritance all at once. Until the triggering ages are reached, a trustee (other than the child) typically makes distributions for the child’s health, education, maintenance, or support.  Similar to the mandatory income and support trust described above, if a child is able to demand a distribution a creditor may have the same demand rights.  Furthermore, once the child receives the distributions of income principal at the age stated in the trust, the distributed assets lose their protection.

A Lifetime Beneficiary-Controlled Trust is a way to leave assets to a child, loved one, or another person.  The child has access to the parent’s assets in the trust as if the parents had left them to the child outright, but the assets are protected from the child’s spouse, creditor’s and others not included in the child’s estate.

Lifetime support trusts are created by the parents when they create their own trusts.  The parents’ trust provides that, after the death of the second parent, the child serves as a co-trustee along with an “independent” distribution trustee.  In other words, the parents’ leave assets to the child’s trust, naming the child as co-trustee to handle the investment of the assets and name a second, independent co-trustee who has complete discretion to make distributions to the child.  According to IRC section 672, an independent trustee is someone other than a spouse, parent, grandparent, sibling, issue, or employee of the beneficiary.  Possible candidates for independent trustee include friends, more distant relatives, such as an aunt, uncle, or cousin; professional fiduciaries; or financial institutions.

In this type of trust, the child is the beneficiary of his or her own trust.  The trust assets are re-titled directly from the parents’ trust to the child’s trust.  If the child becomes a party to a lawsuit, such as a divorce or creditor action, the trust assets are protected because the child does not have the authority and cannot compel the distribution trustee to make distributions from the trust.

A variation on this type of beneficiary-controlled trust allows the child to serve as sole trustee of his or her separate trust.  However, if the child resigns as trustee, he or she must appoint an independent trustee who has complete discretion to make distributions.  The theory is that once the independent trustee is in place, the assets will not be vulnerable because the parent, not the child, established the trust, and the child who is no longer trustee does not have the discretion to distribute income or principal to himself or herself.

I’m a big advocate of protective trusts for many reasons. I’d like to explain these reasons to you if you think a Trust makes sense given your individual and family circumstance(s).

Can the Legal Guardian or Parent of a Minor Child Set Up a Protective Trust?

If a parent dies without a trust in place for their surviving minor children, New Jersey laws provide a way for a surviving parent and/or legal guardian to set up a trust on behalf of their minor child who inherits property from their deceased father, mother, grandparent, or for that matter, any person.

Under N.J.S.A. §3B:12-54.1, a parent or guardian may apply to the Superior Court for permission to set up a support trust for the benefit of the child (or children) who as beneficiaries of an estate will be receiving cash, real estate, and/or assets from the estate of a deceased parent who dies without a Last Will when they are under 18 years of age.

What Provisions Must Be Included in the Minor’s Trust

The statute referenced above specifies the terms that must be set forth in the trust. While the statute uses the word may, it is likely the court will order that language be made “mandatory” (i.e., shall) in the trust. The mandatory provisions are:

  • The trust assets and the income be used for the exclusive benefit of the child as trust beneficiary, including but not limited to the beneficiary’s health, support, maintenance, and education, including college and post-college studies, in the discretion of the trustees;
  • The beneficiary shall have the right to request distributions of trust principal as follows: one-third of the principal after attaining the age of 25 years, one-half of the then balance after attaining the age of 30 years, and all of the then balance after attaining the age of 35 years; or at such other ages as the court, in its discretion, shall determine;
  • Should the beneficiary die prior to the termination of the trust, the remaining trust principal and accrued income shall be distributed to the beneficiary’s estate;
  • Two individual trustees, or one corporate trustee, or a combination thereof, shall serve at all times, with or without bond, as the court shall determine in its discretion; and

The last part of the statute is interesting because a single parent is going to have to find another person to help him or her run the trust, and if the spouse has no other living relatives, counsel will have to ask the court to appoint the surviving parent solely as the trustee.

Understanding the Circumstances Under Which a Court Will Approve a Minor’s Trust

The statute I cited earlier in this section sets forth a list of factors a court will consider before making its decision to approve the minor’s trust. They include:

  • The amount of money involved;
  • The availability of other resources for current maintenance and support;
  • The stability of the entity offering an investment covered by the application;
  • Income tax consequences;
  • Any special needs or vulnerabilities of the minor;
  • The financial and psychological consequences of putting all or a substantial part of the minor’s estate out of reach for a long period of time.

The death of a parent is traumatic enough to a minor child.  Protecting the inheritance of this young person for their adult years is of critical importance.  A support trust is a cost-effective and powerful tool to achieve this goal.

For more information on protecting a loved one’s inheritance using a Trust, contact Fredrick P. Niemann, Esq. a NJ Trust Law Attorney at (855) 376-5291 or email him at

Mr. Niemann welcomes your call and looks forward to helping you.

Fredrick P. Niemann Esq.


Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Trust Attorney