Safeguard Your Children’s Inheritance with a Lifetime Asset Protection Trust

If you love crime documentaries and shows like 20/20 or Dateline as much as I do, then you probably remember this story in the headlines. In undergrad I dual majored in both pre-law and psychology. These types of stories fascinate me when it comes to the psychology of things like cults and how they play on a person's weakness - often to feel a place of belonging and inclusion when they have experienced loss. Though most of us are not dealing with this level of wealth, the amount of money is really irrelevant to the end message. However much you have worked to build and save, you intend to pass that on to your heirs, and the lessons of asset protection remain the same. Read below as I walk through an example of extreme wealth and one of modest inheritance and how a Lifetime Asset Protection Trust could have avoided loss of inheritance in both scenarios. 

Cults? Really??

When you create your estate plan, the idea that one of your adult children would ever use their inheritance to bankroll a cult is probably something you’d never dream of, much less anticipate. Yet that’s exactly what 40-year-old Clare Bronfman, heiress to the multi-billion-dollar Seagram’s fortune, did with hers. In the end, with her inheritance—and the power that came with it—she was led down a dark path that seems almost too outlandish to be true.

Clare pled guilty to felony charges of harboring an illegal alien and fraudulent use of a deceased person’s identity as part of a plea deal with federal prosecutors. The charges stem from her role as an executive board member of Nxivm (pronounced NEX-ee-um), a group that prosecutors described as a “deeply manipulative pyramid scheme” that forced some of its members to endure slave-like conditions and even have sex with the group’s leader and founder, Keith Raniere.

Clare went to trial for her involvement with Nxivm and would have faced up to 25 years in prison. But given her plea, she was sentenced to a little over six years. Following Clare’s plea, Raniere, 58, was found guilty on seven felony counts, including racketeering and sex trafficking. He was sentenced to 120 years in prison. 

From self-help to self-sabotage
Clare joined Nxivm, which was billed as a life-coaching program, in 2002 at age 23. She reportedly joined the group in hopes that its mentoring might help her fulfill her dream of making the U.S. Olympic equestrian team. In large part due to her substantial financial contributions, Clare quickly rose to the top ranks of the organization and became increasingly close with Raniere. According to a recent Forbes article, Raniere took advantage of Clare’s estranged relationship with her elderly father, Edgar Bronfman Sr., and emotionally manipulated her into believing that her family’s money was “evil and that she had to purify it by spending it on ethical things like Nxivm.”

Big money can cause big problems

While we don’t know the exact age Clare came into her money or just how much of it she had access to, her total inheritance was valued at an estimated $200 million. The inheritance was reportedly held in a trust, but given that she funneled roughly three-fourths of that sum into Nxivm in just more than 15 years, it’s likely her money was disbursed outright with little or no direction on how it could be used. 

Though her case is extreme, Clare is certainly not the first person to be negatively impacted by inheriting too much money at a young age—nor will she be the last. Similar cases occur quite often, and no matter how well adjusted your children, grandchildren, or young heirs may seem, there’s just no way to accurately predict how their inheritance will affect them.

Unforeseen threats
Clare’s sad story highlights just how risky it can be to leave money outright to your children. Indeed, bestowing significant wealth upon your children or grandchildren can turn out to be a blessing—or it can just as easily be a curse.

Fortunately, there are proactive estate planning solutions designed to safeguard your adult children from such scenarios. And contrary to what some might think, these planning protections aren’t just for the extraordinarily rich and the mega wealthy like Clare’s family—inheriting even relatively modest amounts of wealth can lead to similar issues. In fact, the asset protection they provide is even more valuable for those leaving behind a modest inheritance. With less money to pass on, it’s much more likely that the inheritance could be totally wiped out by a single unfortunate event, as opposed to a much larger inheritance, which might survive even multiple mishaps. Regardless of your asset profile, I can help you put the proper planning vehicles in place to help prevent your heirs from falling prey to wealth’s darkest temptations—or even losing their inheritance to simple mistakes.

One unique planning vehicle designed to prevent the potential perils of outright distributions is a Lifetime Asset Protection Trust (LAPT). These trusts last for the lifetime of their respective beneficiaries, and provide them with a unique and priceless gift. With an LAPT, for instance, the beneficiary can use and invest the trust assets, yet at the same time, the trust offers airtight asset protection from unexpected life events, such as divorce or serious debt, which have the potential to wipe out their inheritance.

To demonstrate how LAPTs can provide protection to families of all asset profiles, here we’ll describe another true story involving a tragic—yet much more relatable—life scenario. While the following events are entirely true, the individual’s name has been changed for privacy protection.

The flooded penthouse

Eric was staying at a friend's apartment in New York City. The apartment was the penthouse of the building, and Eric decided to run himself a bath. While the bath was running, another friend called and invited Eric to go out with him, which he did.

At about 2 a.m., Eric came back to the apartment and discovered he made a huge mistake and left the bath running when he left the apartment. The resulting flood caused more than $400,000 in damage to the apartment and the one below it. While there was insurance to cover the damage, the insurance company sued Eric for what's known as "subrogation,” meaning the company sought to collect the $400,000 they paid out to repair the damage Eric caused to the property.

Because the flood was due to his negligence in leaving the bath running—a simple, but costly mistake—Eric was responsible for the damage. Now here’s where the inheritance piece comes into play and why it’s so important to leave whatever you’re passing on to your heirs in a protected trust. If Eric had received an inheritance outright in his own name, he would have lost $400,000 of it to this unfortunate mishap.

However, if Eric had received an inheritance in an LAPT, instead of an outright distribution, his inheritance would be completely protected from such a lawsuit—and just about any other threat imaginable.

Indeed, the planning strategies I describe here can safeguard your child’s inheritance from being depleted out by other, less devious events, such as a divorce, a catastrophic medical expense, or even a simple accident. You just never know what life has in store for your heirs, and creating the proper planning tools can ensure their inheritance is protected from practically all potential threats—even those you could never possibly imagine.

Safeguarding your children’s inheritance
If you’re like most people, you hope to leave an inheritance for your children. Indeed, it may even be one of the primary motivations driving your life’s work. Yet if you don’t take the proper precautions, the wealth you pass down can easily be lost or squandered. And in certain cases, such as Clare’s , the inheritance can even end up doing more harm than good. 

When it comes to leaving an inheritance, most lawyers will advise you to place the money in a trust, which is the right thing to do. However, most lawyers would have you distribute the trust assets outright to your loved ones at specific ages, such as one-third at 25, half of the balance at 35, and the rest at 40. Check your own trust now to see if it does this or something similar.

Giving outright ownership of the trust assets in this way puts everything you’ve worked so hard to leave behind at risk. While a trust may protect your loved ones’ inheritance as long as the assets are held by the trust, once the assets are disbursed to the beneficiary, they can be lost to future creditors, a catastrophic accident or illness, divorce, bankruptcy—or as in Eric’s case, a major lawsuit.

Rather than risking their inheritance by leaving it outright to your children at certain ages or following certain life events, such as graduating college, you can gift your assets to your children at the time of your death using an LAPT. When you gift an inheritance to your kids via an LAPT, the trust owns the assets, not your children.

Therefore, if your kids ever get divorced, file bankruptcy, have a major medical issue, or are ordered to pay damages in a lawsuit, they can’t lose their inheritance because they never owned it in the first place. An LAPT can be built into a revocable trust, which becomes irrevocable at the time of your death and holds your loved one’s inheritance in continued trust for their lifetime. A trustee of your choice manages the trust assets upon your death. 

Exercise your discretion
If you’re afraid that a trustee would keep your beneficiary from using the trust assets, you can build in protections to ensure your beneficiary has flexible use, unless there would be a significant risk of loss if he or she did. You can even allow your beneficiaries to become co-Trustees and then sole Trustees of their own LAPT. When drafted properly, an LAPT can be used to educate your beneficiary on how to handle their inheritance. This is done by allowing the beneficiary to become a co-trustee with someone you’ve named at a specific age or stage of life, and then the beneficiary can become the sole trustee later in life, once he or she has been properly educated and are ready to take over.

The LAPT is discretionary, which means that the trust would not only protect your heir from outside threats like creditors and ex-spouses, but also from their own mistakes. The trustee you name holds the trust’s assets upon your death. This gives the person you choose the power to distribute its assets to the beneficiary at their discretion, rather than requiring him or her to release the assets in more structured ways, such as in staggered distributions at certain ages. This discretionary power enables the trustee to control when and how your kids can access their inheritance, so they’re not only protected from outside threats like ex-spouses and creditors, but from their own poor judgment as well.

Your direction and guidance
Many of my clients choose to provide non-binding guidelines directing the trustee on how the client would choose to make distributions in up to 10 different scenarios, such as for the purchase of a home, a wedding, the start of a business, and/or travel. Some clients choose to provide guidelines around how they would make investment decisions, as well.

This ensures that future trustees will be aware of your values when determining whether to make distributions, as well as how to invest trust assets, rather than operating in a vacuum of information, which often leads to problems down the road. In many cases, the beneficiary may eventually become the trustee him or herself, and then resign and appoint an independent trustee, if needed, for asset-protection purposes.

Don’t take any chances
You might think that something as depraved as what happened to Clare Bronfman would never happen to your children or grandchildren—but don’t be so sure. It can, and does, happen to even the most successful and upstanding among us. Having too much money at a young age is a Pandora’s Box, so it’s best not to open it.

Yet even if your heirs never experience a threat as evil as Nxivm and Raniere, their inheritance is still vulnerable to more common threats like divorce, poor spending, and sudden accident or illness.

A priceless gift
If you wish to protect your child’s inheritance from all possible threats, while incentivizing them to invest and grow the money rather than squander and waste it, consider including a Lifetime Asset Protection Trust in your plan for the ones you love. Indeed, the trust’s highly flexible structure, combined with its bulletproof asset protection make it one of the most valuable gifts you can give your loved ones.

Meet with me as your Personal Family Lawyer® to see if a Lifetime Asset Protection Trust is the right option for protecting your family wealth and loved ones from situations and circumstances (no matter what they may be), which are simply impossible to foresee.  There are several different ways we can structure the trust to meet your family’s unique needs, so be sure to ask us what options might be best for your particular situation.