What is a legacy trust?

Sometimes known as a wealth trust, a legacy trust is an irrevocable trust that lets you set aside assets for future generations. The legacy trust is a flexible asset protection and saving option that allows you to use funds for emergency situations or create an estate to pass on.

How a Legacy Trust Works

The legacy trust functions as a second, protected estate. It essentially removes assets out of your primary estate and into a secondary estate in the form of the trust. This places assets out of reach of creditors and protects them from estate and death taxes. You can set up the legacy trust and fund it during your lifetime via annual gifts.

Unlike with similar trusts, the donor cannot also be the trustee--one has to be appointed. However, you do not have to wait until the donor is incapacitated or passes away to use the legacy trust assets. In some ways the legacy trust acts like a “savings” plan. The trustee can direct funds to be used for college tuition, or income for children or grandchildren. The legacy trust can be used for emergency medical or long-term care needs for the donor or creator of the trust.

When the donor passes away, the trustee can distribute the legacy trust assets. However, because this is not an inter vivos (“during life”) transfer, the assets will be subject to probate. The donor may want to strategically transfer assets to beneficiaries during his or her life to avoid this situation. This decision is best made after consultation with an attorney.

Benefits of a Legacy Trust

As your "second" estate, the legacy trust affords you some degree of asset protection. It has tax benefits and is not subject to the same Internal Revenue Service rules as a traditional estate. With the exception of assets transferred at the time of death, the legacy trust is not subject to probate or administered with court supervision. That means activities associated with the trust assets are kept confidential and out of public record.

Because it is considered separate and outside of your assets, the legacy trust acts as a wall, protecting your assets against divorcing spouses of children, creditors, and judgments against you and your family. Taking advantage of this type of protection can be complicated. How and when the legacy trust is set up may make it vulnerable to certain types of credit or legal action. This is another issue which ought to be discussed with an attorney.

Getting Legal Help

While the legacy trust offers a number of benefits and a high level of flexibility for an irrevocable trust, setting one up requires a high level of technical expertise. There are a number of tax and legal issues that are unique to the legacy trust. This is why it's important to find a trust company and estate planning attorney who is familiar with the legacy trust and capable of advising you about whether it's the right choice for your situation.