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The Inheritance Trust—Upstream Multigenerational Planning

Typically, when doing estate planning, the focus is on “downstream” estate planning.  Downstream planning is concerned with passing assets in the most advantageous way to the client’s descendants with provisions for creditor protection, support and education, as well as ways to minimize estate and generation skipping taxes.

However, there is an opportunity to plan for multiple generations by also considering “upstream” estate planning.  This type of planning involves working with the client as to the best way for the client to receive an inheritance from his or her own parents, grandparents, or other relatives.  Such planning can have a great benefit to the client, as well as to his or her descendants.

Upstream planning may provide multiple benefits to you and your family.  Such planning can allow you the use and enjoyment of the inheritance without it being included in your own taxable estate, and without it being subject to the claims of your creditors.  For those with taxable estates, receiving an inheritance outright will only increase the estate tax burden on your own family at your death.  Properly planned, you could receive the inheritance in such a way that it will not be taxed at your death and may be able to pass through many generations without being subject to erosion by any estate or generation skipping tax.  With marginal tax rates of 41% to 49%, such planning quickly justifies the planning process.

In addition to the tax benefits, upstream planning can provide creditor protection for you and your descendants.  In the past, creditor protection has been a concern for many wealthy families and those in high risk professions.  It is now gaining attention and importance among middle-class families as well, and such creditor protection planning is becoming more popular.  Creditor protection planning can provide peace of mind for many individuals.  This type of planning can protect an inheritance from division or dissipation upon termination of marriages as well.

There are various ways that such upstream planning can take place.  One is through coordination of the parents’ overall estate plan with their children’s estate plans.  A second is by an “inheritance trustee” and a simple codicil to a will to provide that inheritance will pass to the “inheritance trust” instead of outright to a child.  The design of the trust that will receive the inheritance can be prepared to give you the functional equivalency of ownership, but with greater creditor protection and significant tax advantages.