- Assets are protected from divorce. In a traditional estate plan, if you leave a child an inheritance and that child later divorces, the ex-spouse will likely receive a portion of the inherited assets. This is because in real life, inheritances are almost always mixed with "marital assets", which leaves them open to equitable distribution in a divorce. In addition, any income earned on the assets that your child does retain may end up being paid to the ex-spouse in the form of alimony or child support. Use of a Bloodline Trust can eliminate all of these negative consequences.
- Assets are protected from financial calamity. In a traditional estate plan, if you leave a child an inheritance and the child later gets into financial trouble, those assets may be seized by creditors. With a Bloodline Trust, however, those assets can be protected.
- Assets are protected from double (or triple) taxation. When you pass away, your assets are included in your "taxable estate" and as such are subject to both New Jersey and federal estate taxes. [The New Jersey estate tax applies if the total of all of your assets (including your home, life insurance, retirement accounts, and all other assets) exceeds $675,000. Federal estate tax applies if the value exceeds $5.25M (adjusted each year for inflation).] With a traditional estate plan, not only are those assets subject to estate tax at your death, but when your children die, any remaining assets will be subject to estate tax a second time when they pass down to your grandchildren, and potentially a third time if any assets pass down to great-grandchildren. With a Bloodline Trust, this double or triple taxation can be eliminated completely.
Now that we've laid out the benefits, let's talk about the mechanics of how these trusts work.
Upon your death (or the death of both you and your spouse, if married), your assets are split among your children in a manner that you decide in your Will. But instead of each child receiving his or her share outright, each child's share is put into a separate trust for his or her benefit.
You can allow your child to be trustee of his or her own trust if you so desire, or you may choose a third party trustee like a bank or trust company.
Regardless of who is trustee, the trustee may invest trust assets. The trustee may also purchase assets in the name of the trust for use of your child. If your child is trustee, he or she may also withdraw assets from the trust for his or her "health, education, maintenance, and support".
If a divorce or other financial trouble is on the horizon, at that point your child resigns as trustee or appoints a co-Trustee to serve. That's when the protection "kicks in".
These trusts have become increasingly common as parents seek to protect their children from both divorce and double taxation. If you have any questions, feel free to contact me.
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