Heirs often assume that their inheritance is protected from creditors, taxes, divorce and undue influence, if there was an incapacity. But, there may be little support for this assumption unless inheritance trusts were properly planned. Several components should be considered.
The person who receives the inheritance, the client, is named as the trustee and may designate the successor trustee, if they resign, die or suffer incapacity. Any successor trustees must comply with reasonable limitations, such as limiting successors to their spouse, children or a trust company to assure that a person outside of their family cannot overtake the trust.
The client should also have the power to direct how the trust's assets pass after their death. These assets usually go to descendants, parents or even charities. But, a committee of independent non-beneficiaries may have the authority to give the client the power to appoint assets to their estate's creditors to assure assets receive income tax basis equal to their fair market value.
Additionally, clients may also receive a lifetime power of appointment, which grants them powers when they are still alive. This allows them to transfer assts to trusts for the client's children and other descendants.
The trust should also allow for the appointment of trust protectors who are not beneficiaries. They may alter the trust if there are major changes to the family circumstances, tax laws or Michigan law. Protectors usually have the power to make changes to the trust document for the beneficiaries' benefit, such as the ability to modify the trusteeship, modify its dispositive terms and change its location.
Finally, many parents do not want to deal with the complication of setting up an inheritance trust. When this occurs, a separate irrevocable trust is signed by their children. That trust then becomes the beneficiary of the parent's plan instead of their children. A separate irrevocable trust will contain terms that benefit the children's successors that apply when a child dies before their parents or they did not exercise their appointment power.