Trusts can do some amazing things. They can allow someone to control the distribution of assets long after they have passed away. They can segregate assets from an estate, allowing the maximization of estate tax exemptions and a minimization of estate tax liability. They can also serve to protect a beneficiary from him or herself by providing spendthrift protection.

A spendthrift trust allows a trustee to manage assets placed in a trust for the benefit of a beneficiary according to the terms of the trust document. Typically a trust will allow the trustee to make distributions for expenses related to a beneficiary’s health, support, education, and maintenance, though this standard could be loosened or tightened depending on the circumstances under which the trust was created. If a beneficiary is sued or otherwise pursued by creditors, the trustee need not make further discretionary distributions to the beneficiary, thereby preserving the trust assets.

There is a catch, however. Only sixteen states allow for the creation of self-settled spendthrift trusts, and Minnesota is not one of them. A self-settled trust is a trust created by a person for his or her own benefit in the hopes of creating a barrier between the person and creditors. If the creator of the trust is sued, the creditors are unable to reach the trust assets.

Even when a state allows for self-settled spendthrift trusts, there are strict requirements. South Dakota’s self-settled trust laws require, among other things, a trustee to be located in South Dakota permanently. That means that the person or entity managing the trust typically has to be a South Dakota resident — for this reason, a professional trust company is generally hired to act as the trustee. The trust must be governed by South Dakota law, so it will typically be drafted by a South Dakota attorney. Some of the trust property must be located in South Dakota, and any transfer to the trust must not be fraudulent and has a two-year statute of limitations (meaning if the person creating the trust is sued during the first two years, the assets are not protected).

The creating of any trust is a job for a professional. If you have questions about trust planning, speak to a qualified trust attorney.

Will I Pay Estate Tax?

Join Attorney Philip J. Ruce in this ongoing video series as he briefly discusses frequently asked questions in estate and trust planning.

Today, Philip discusses the likelihood that you will pay estate tax.

*** The Minnesota state estate tax exemption has since been increased. In 2018 the individual exemption is $2.1M, increasing to $3M by 2020. (last updated September 29, 2017)

I was quoted extensively in this article on wills and estate planning. The article deals with whether assets should be left to children “equally” or “equitably.” Equally of course meaning that everyone gets an equal share. Equitable is little more fuzzy, and deals with what is “fair,” considering such things as who has received more help from mom and dad during their lifetime, who spent more on mom and dad’s care when they were in their elder years, etc. Here’s an excerpt from the full article, found at Investopedia, written by Amy Fontinelle.

Could a Child Sue for More?

If you decide not to divide your assets equally among your children, understand that you’re putting your plans and your children at risk of going through a lawsuit. How significant is this risk, and how likely is it that the result will be a different division of assets than the one you desired?

“Children can always sue, but there generally needs to be a valid basis for a will contest,” says Jeffrey R. Gottlieb, an estate planning attorney in Palatine, Ill. With careful estate planning, however, you can mitigate any challenge. The first step is to draft your will with the assistance of an estate planning attorney, while you’re of sound mind and memory, and without undue influence from one of your children. (For related reading, see Do You Need an Estate Planning Lawyer? and How to Reduce Estate Planning Attorney Fees.)

“Undue influence” means that one of your other children believes – or at least thinks it can be proved in court – that you were manipulated during the process of creating your will. As a result, that child contends, you expressed wishes that you otherwise wouldn’t have or that weren’t really what you wanted.You won’t be there to defend yourself against such a claim so you need to make sure no one can successfully argue it.

“Lack of capacity,” another way a will can be challenged, means that you didn’t understand what you were doing when you created or changed your will, perhaps because of your age or because a physical or mental illness had deteriorated your ability to make sound decisions. A child could also try to argue that your will isn’t valid because of fraud or because your signature wasn’t witnessed.

There are ways to minimize the chances of a less-favored child contesting your will in court, and ways to minimize their chances of winning if he or she does. “A no-contest clause paired with at least some nominal gift can create a disincentive to challenge,” Gottlieb says. The no-contest, or non-contestability clause, is, basically, language in your will stating that any inheritor who takes your will to court forfeits any bequests. That’s where the nominal gift comes in – for the clause to be effective, your child has to have something to lose. You’ll need to leave the less-favored child enough that he or she likely has more to gain by keeping quiet than by going to court.

It’s an unpalatable option, to be sure, but it might mean the best chance of keeping your will intact. The enforceability of these clauses varies by state, however, so check your state’s laws before considering this option.

Estate-planning experts say other ways to avoid challenges to your will include:

  • using a trust to provide structure for a child who might not be able to manage an inheritance responsibly on his or her own (learn more in Advanced Estate Planning: Using Trusts)
  • having your doctor be a witness when you sign your will to invalidate claims of lack of capacity
  • excluding all children from the will-writing process to invalidate claims of undue influence
  • discussing your will with each child to avoid surprises and explain your reasoning

A lawsuit of this type is always most likely to end in a settlement, Ruce says. “That settlement will in some way vary your estate plan because funds will likely end up in a different place or with a different person than you had hoped.”

The Bottom Line

“The most important thing to remember when dividing up an inheritance is that it is your money, and you have a right to do with it what you choose,” Ruce says. That said, an equal inheritance makes the most sense when any gifts or financial support you’ve given your children throughout your life have been minimal or substantially equal, and when there isn’t a situation where one child has provided most of the custodial care for an aging parent.

“When there is actual or perceived inequality,” Ruce says, “the likelihood of someone looking for legal remedies increases substantially.” You have to decide how significant that risk is given your children’s temperaments and their relationships with each other, and whether any risk in leaving an unequal inheritance is worth what you’re trying to accomplish. (For further reading, see Tips for Family Wealth Transfers.)

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees, available at Amazon.com in paperback or Kindle edition (free chapter available here!). He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

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