Estate planning isn't a one-way street. Sometimes, you're on the receiving end of the dollars, instead of the giving end. Example: You may be in line for a hefty inheritance when a parent passes away.
Strategy: Set up an "inheritor's trust." Essentially, that's an empty bucket that catches the money when the inheritance is paid out. In other words, you take the initiative instead of the family member who currently owns the assets that you will eventually inherit.
An inheritor's trust can protect funds from creditors, ex-spouses and estate taxes. If you follow the guidelines for so-called dynasty trusts, it can provide benefits for generations to come.
A dynasty trust is generally set up to last over 100 years and to provide future payments without triggering estate tax or the generation-skipping tax (GST). So, both you and your heirs benefit.
Here's the skinny: The inheritor's trust is a new variation on an old theme. (Last year, several estate-planning pros trademarked the name "Inheritor's Trust.") Basically, the trust is designed to provide beneficiaries with flexibility to react as tax laws and family circumstances change. To receive maximum protection, the trust must be established before you receive the inheritance.
Typically, the trust names you (the trust beneficiary) along with your financial pro as co-trustees. You control the investment decisions while your tax pro maintains discretion over distributions. As a co-trustee, you may be empowered to dump the other trustee (your tax pro) and name a new one.
Since the trust, rather than you, is the legal owner of the assets, those assets become off-limits to creditors and divorcing spouses, even under the new bankruptcy law taking effect in October.
Beware hidden costs. Those benefits come with a stiff price tag. Depending on the size and complexity, such trusts can cost more than $10,000 to set up, plus you usually need to pay an annual fee to the co-trustee (e.g., equal to 1 percent of the assets). And you'll need to convince the current owner of the arrangement's merits. Usually, he or she will need to amend his or her will to accommodate the trust.