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A dynasty trust that requires a family chat
Rick Miller
August 22, 2005
CHICAGO - Discussing one's future inheritance with parents may be awkward,
but such a conversation is something more estate and financial planners are
likely to start recommending.
The reason: increased attention on a relatively unused estate-planning tool
known as the inheritor's trust.
A special type of dynasty trust designed for the heir - with the grantor's
assent - to receive an inheritance, it protects those assets from estate
taxes, divorce settlements and creditors.
"Most of our clients already have an estate tax problem, so when they
receive an inheritance, it is just increasing their estate tax problem,"
said Steven J. Oshins, an estate-planning attorney with Oshins & Associates
LLC in Las Vegas.
"[The inheritor's trust] keeps it outside of our client's estate for estate
tax purposes, creditor protects it, and divorce protects it, which is very
valuable."
Unlike many irrevocable trusts, it is drafted to give the heir the power to
make all investment decisions for the trust.
New awareness
Although some estate-planning attorneys say they have been setting up such
trusts for at least 10 years, awareness and interest - particularly among
financial planners - have been heightened by recent lectures and articles on
the technique by Mr. Oshins and others. "It is like a V8 moment," said
Vincent M. D'Addona, a New York-based chartered financial consultant and
accredited estate planner, referring to the vegetable juice advertisements
of years ago. "You smack yourself on the head and say * 'Why wasn't I doing
this?'"
Mr. D'Addona, who does business as Strategies for Wealth Creation and
Protection, had heard Mr. Oshins speak on the topic, but it only recently
sank in as viable trust for his client. Nearly every client in the past six
months either has been exposed to the concept or formed the trust, he said.
"What's bizarre is that it's really a pretty simple concept, but it is
counterintuitive" for an adult child to facilitate a planning maneuver for
parents, said William Van Pelt IV, president of The Mid-Continent Cos. Ltd.,
a Houston financial planning firm with $500 million under advisement. "I
guess that's why most people aren't familiar with it."
"It has gained interest more recently, because more people have
more-significant wealth," noted Michael C. Foltz, a former estate-planning
attorney who is a principal with Balasa Dinverno & Foltz LLC in Itasca, Ill.
His firm, which has $900 million under management, recommends the trusts.
"Practitioners are looking for ways to protect assets from claims and
creditors, and to preserve assets being passed down to their children," he
said.
Even if it's a touchy subject for an adult child to raise the topic of their
inheritance, the benefits can be too overwhelming not to bring it up,
advisers said.
"Sometimes, when you are talking to a 55-year old client, they still see
themselves as 15 years old in the eyes of their parents, so isn't it
important that they kind of get over that?" added Mr. D'Addona, who would
not disclose assets under management. "I am all about straight communication
with people."
The inheritor's trust - sometimes called a lifetime or heritage trust - is a
dynasty trust (an irrevocable trust that continues into perpetuity under
many state laws) that is drafted as a discretionary trust, whereby an
independent trustee has absolute discretion over distribution.
The name "inheritor's trust" was trademarked last year by Mr. Oshins, his
father, Richard Oshins, and Fort Worth, Texas, lawyer Noel C. Ice.
Under a discretionary-trust format, Steven Oshins explained, the inheritor
is the investment trustee but chooses his "best friend" as the distribution
trustee. Nevertheless, the inheritor can fire the distribution trustee at
any time if things aren't going as planned.
Typically, lawyers who draft generation-skipping trusts - which avoid estate
taxes if the inheritor leaves the assets in the trust to pass on to their
own heirs - design them as a support trust, in which the inheritor is the
sole trustee, but then distribution is limited to "health, education,
maintenance and support," Mr. Oshins said. With a support trust, the
creditor protection is not quite as strong, he added.
In the case of the inheritor's trust, designed in this manner, "the entire
inheritance will be protected from bankruptcy, protected from divorce,
protected from personal guarantees, protected from [a judgment or settlement
from] car accidents, or any other type of claim that can be made against the
beneficiary."
To work, however, it requires a discussion with the parents or relatives who
intend to pass along the assets - and some action on their part.
The parents, for instance, have to change their estate-planning documents to
direct that the inheritance go into the trust rather than pass directly to
the child, as is typically done. The inheritor's trust also requires a third
party to set it up officially, and usually, the parents are asked to sign as
the grantor, Mr. Oshins explained.
Some financial planners are deftly brokering those arrangements. Steven
Podnos, a fee-only planner and part-time physician who runs Wealth Care LLC
in Merritt Island, Fla., recently raised the subject of the trust with a
wealthy client in his 70s. Mr. Podnos also does planning for the client's
daughter, who is in her 40s, and brought up the subject with her as well.
"I am kind of going between the two of them," said Mr. Podnos, who has $30
million under management. "I am saying to the daughter, 'I am going to
advise your dad that what he leaves you should be left in trust
indefinitely, and that is to protect you * Don't feel like you are being
controlled from the grave; there are sound financial reasons," such as the
ones cited above, for leaving the assets in a trust.
"And at the same time, I am saying to the father, 'Listen, rather than just
do what an estate-planning attorney would do out of routine, think about
this.'" he said.
No awkwardness
Mark Levine, a 37-year old entrepreneur from Marina del Rey, Calif.,
recalled experiencing no awkwardness when he raised the topic of an
inheritor's trust with his parents. He said that he always has had an open
line of communication with them on money-related topics.
"They've been open to talk about that stuff for years, and so it just came
more natural," said Mr. Levine, a client of Mr. Oshin's. Mr. Levine became
more concerned about asset protection issues when he recently formed a new
company that designs fountains and waterscapes for Las Vegas hotels.
"Maybe for families that don't talk about [financial matters], it would seem
to be an awkward situation to bring up," he added. "When we talk about it,
it is just one of the duties you have as a prudent family member."
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