What is a legacy trust?

Sometimes known as a wealth trust, a legacy trust is an irrevocable trust that lets you set aside assets for future generations. The legacy trust is a flexible asset protection and saving option that allows you to use funds for emergency situations or create an estate to pass on.

How a Legacy Trust Works

The legacy trust functions as a second, protected estate. It essentially removes assets out of your primary estate and into a secondary estate in the form of the trust. This places assets out of reach of creditors and protects them from estate and death taxes. You can set up the legacy trust and fund it during your lifetime via annual gifts.

Unlike with similar trusts, the donor cannot also be the trustee–one has to be appointed. However, you do not have to wait until the donor is incapacitated or passes away to use the legacy trust assets. In some ways the legacy trust acts like a “savings” plan. The trustee can direct funds to be used for college tuition, or income for children or grandchildren. The legacy trust can be used for emergency medical or long-term care needs for the donor or creator of the trust.

When the donor passes away, the trustee can distribute the legacy trust assets. However, because this is not an inter vivos (“during life”) transfer, the assets will be subject to probate. The donor may want to strategically transfer assets to beneficiaries during his or her life to avoid this situation. This decision is best made after consultation with an attorney.

Benefits of a Legacy Trust

As your “second” estate, the legacy trust affords you some degree of asset protection. It has tax benefits and is not subject to the same Internal Revenue Service rules as a traditional estate. With the exception of assets transferred at the time of death, the legacy trust is not subject to probate or administered with court supervision. That means activities associated with the trust assets are kept confidential and out of public record.

Because it is considered separate and outside of your assets, the legacy trust acts as a wall, protecting your assets against divorcing spouses of children, creditors, and judgments against you and your family. Taking advantage of this type of protection can be complicated. How and when the legacy trust is set up may make it vulnerable to certain types of credit or legal action. This is another issue which ought to be discussed with an attorney.

Case Studies: Legacy Trusts and their Benefits as Protected Estates

Case Study 1: The Thompson Family’s Legacy Trust for Asset Protection

The Thompson family, consisting of John and Mary, successful entrepreneurs, had accumulated substantial wealth over the years. Concerned about protecting their assets from potential business risks and unforeseen legal claims, they decided to establish a legacy trust. With the assistance of an experienced estate planning attorney, they structured the trust to safeguard their assets and provide for their children and future generations.

Several years later, one of the businesses faced financial difficulties, leading to a lawsuit from a dissatisfied customer. Thanks to the legacy trust, the assets held within it were shielded from the lawsuit, ensuring that the family’s core wealth remained protected. Additionally, the trustee was able to allocate funds from the trust to cover legal expenses, ensuring a strong defense against the lawsuit without jeopardizing the family’s financial security.

Case Study 2: The Roberts Family’s Legacy Trust for Generational Wealth Transfer

The Roberts family, comprising James and Emily, was passionate about preserving their wealth for the benefit of their children and grandchildren. They decided to set up a legacy trust, allowing them to transfer assets to future generations while minimizing estate taxes. By funding the trust with various real estate holdings and investment accounts, they could ensure a steady stream of income for their descendants.

As the family grew, the legacy trust played a crucial role in providing financial support for educational expenses. One of their grandchildren, Sarah, expressed interest in pursuing a medical degree. Thanks to the legacy trust, Sarah’s education was fully covered, allowing her to focus on her studies without the burden of student loans. The trust’s flexibility and foresight in planning for the family’s future needs ensured a lasting legacy of educational opportunities.

Case Study 3: The Anderson Family’s Legacy Trust for Charitable Giving

The Anderson family, consisting of Thomas and Laura, was not only concerned about providing for their children’s financial security but also had a deep desire to support charitable causes they were passionate about. They established a legacy trust, naming a reputable charitable organization as one of the beneficiaries.

Over time, the family’s assets continued to grow, and the legacy trust accumulated significant wealth. As Thomas and Laura reached retirement age, they decided to pass the trustee responsibilities to the charitable organization, ensuring a smooth transition. The trust’s assets were then used to support various charitable projects, ranging from education initiatives to community development programs. The Anderson family’s legacy trust became a powerful instrument for philanthropy, making a positive impact on the lives of many.

Getting Legal Help

While the legacy trust offers a number of benefits and a high level of flexibility for an irrevocable trust, setting one up requires a high level of technical expertise. There are a number of tax and legal issues that are unique to the legacy trust. This is why it’s important to find a trust company and estate planning attorney who is familiar with the legacy trust and capable of advising you about whether it’s the right choice for your situation.