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Should Your Estate Plan Have Separate Share or Preservation Trusts? | Repair The Roof Podcast

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In this episode, Ted Gudorf highlights the importance of protecting family wealth through trusts, specifically focusing on separate share trusts and preservation trusts. He explains how these irrevocable trusts can shield assets from creditors, lawsuits, and other financial risks, ensuring that wealth is preserved for future generations. Ted provides real-world examples to illustrate the benefits of each trust type and offers guidance on choosing the right trust based on individual family situations.

Key Topics

Protecting Your Legacy: The Importance of Trusts 00:00
Understanding Separate Share Sub-Trusts 04:51
Exploring Preservation Trusts: Flexibility and Control 10:06
Choosing the Right Trust for Your Family 12:01
Conclusion and Next Steps for Estate Planning 13:01

Separate Share vs. Preservation Trusts: Which Strategy Will Keep Your Family’s Wealth Intact?

Protect your assets from creditors, lawsuits, divorces, and nursing home costs—so your legacy lasts for generations.

Why Your Inheritance Is at Risk

You’ve spent decades building a nest egg for your loved ones, yet 70% of inherited wealth vanishes by the second generation and 90% by the third. It’s not just a statistic; it’s a harsh reality for families who rely solely on wills or outright gifts. When you leave assets directly to your children, you expose those funds to:

Divorce proceedings. A court can award a spouse up to half of the assets your child inherits, leaving nothing for grandchildren.
Lawsuits or creditor claims. One accident or one business misstep can wipe out an inheritance in an instant.
Nursing home costs. Without proper planning, your heirs may have to spend down assets before qualifying for Medicaid.

Avoiding these pitfalls isn’t about distrust—it’s about protecting life’s work. By using irrevocable sub-trusts rather than simple bequests, you keep your heir’s inheritance safe, structured, and guided by your intentions.

Key Takeaways:

70% of inherited wealth disappears by the second generation.
Separate shared trust and preservation trust are key strategies.
Irrevocable trusts provide protection from creditors and lawsuits.
Separate share sub-trusts create individual accounts for beneficiaries.
Decanting allows beneficiaries to transfer assets to a new trust.
Preservation trusts offer more flexibility and control.
Choosing the right trust depends on family needs and goals.
Establishing a trust is a small investment for asset protection.
Proper trust planning can weather financial storms for generations.
Don't wait to protect your legacy; act while you can.

The Power of Irrevocable Trusts

Both Separate Share Trusts and Preservation Trusts are irrevocable. That means once established, you cannot modify or revoke them at will. This irrevocable status is precisely what gives these trusts the teeth to withstand creditor claims, divorce settlements, and government benefit lookbacks.

Key Insight #1: Irrevocability is the cornerstone of true asset protection. By removing legal control from the beneficiary (but keeping beneficial enjoyment intact), you put a firewall between your family’s wealth and external threats.

Before diving into each trust type, keep this in mind: you’re not just handing your children cash. You’re giving them a secure vault—a structure that ensures assets serve the intended purpose even if life takes an unexpected turn.

What Is a Separate Share Trust?

A Separate Share Trust (often called a “separate share sub-trust”) breaks your assets into individual pots—one for each beneficiary. Instead of leaving everything to a single, general trust or splintered gifts, you create distinct accounts for each child or grandchild. Here’s how it works:

You establish a master trust agreement. Under that umbrella, each beneficiary receives a sub-trust.
Each beneficiary serves as Management Trustee. They decide how their share is invested and used.
A Distribution Trustee acts as a firewall. Typically, the beneficiary picks a non-related friend, in-law, or professional advisor. This trustee controls distributions to the beneficiary, shielding the assets from claims.
Limited distribution powers. Your original trust document sets strict criteria—education, medical needs, general support—so funds aren’t squandered.

Why It Matters:

Suppose you have three children aged 30, 32, and 35. If one child faces divorce or a high-liability lawsuit, that sibling’s portion remains locked within his or her sub-trust. A court or creditor cannot reach directly into that sub-trust.
If a beneficiary needs nursing home care, Medicaid looks at these assets differently because the trust is irrevocable and outside direct ownership.

Tax Implications:

Separate share trusts are non-grantor trusts. You must obtain an EIN and file IRS Form 1041 annually if the sub-trust earns income.
If no distributions occur, the trust pays taxes at compressed trust rates (which hit the highest tax bracket at much lower income thresholds).
If distributions are made, the beneficiary receives a Schedule K-1 and pays tax at his or her own rate.

Key Insight #2: Non-grantor status creates complexity (extra tax filings), but that’s the trade-off for powerful creditor protection. For many families, paying a bit more on taxes is worthwhile when a lawsuit or divorce could otherwise wipe out an inheritance.

What Is a Preservation Trust?

Think of a Preservation Trust as a Separate Share Trust on steroids—sometimes called “Separate Share 2.0.” It retains all the asset protection features but adds two major advantages:

Greater Flexibility Through Decanting. A beneficiary can “decant” their existing Separate Share Trust into a Preservation Trust—much like pouring wine off the sediment. In practice, this lets them move assets into a new trust with updated terms that fit their current life circumstances.
Better Tax Treatment. Preservation Trusts qualify as grantor trusts with respect to the beneficiary. That means the trust’s income flows through to the beneficiary’s Social Security number, avoiding a separate Form 1041 and the compressed trust tax brackets.

Here’s how a Preservation Trust generally works:

Beneficiary designs the trust agreement. Instead of you (the original grantor) defining rigid distributions, the beneficiary controls terms—who can become successor trustee, how discretionary distributions occur, and so on.
Successor Trustees named by the beneficiary. Because the beneficiary tailors the terms, they choose successors who understand their unique needs—whether handing control to a sibling, close friend, or a professional advisor.
Decanting option. Should circumstances change—marriage, children, business ventures—the beneficiary can move assets from a Separate Share Trust into a fresh Preservation Trust without losing original asset protection.

Tax Benefits at a Glance:

As a grantor trust, income is reported on the beneficiary’s Form 1040. You avoid the top trust tax rate (37%) kicking in at $14,450 of income (2025 thresholds).
There’s no separate tax return for the trust. Simplified reporting means more of the earnings work for your family instead of going to Uncle Sam.

Key Insight #3: Decanting empowers beneficiaries to adapt. If your child inherits in their 30’s, they may not need maximum flexibility immediately. But in their 50’s—when business liability or nursing home planning becomes critical—they can convert seamlessly, preserving asset protection while adjusting terms.

Key Insight #4: If you know all your beneficiaries share similar life circumstances—modest asset levels, low liability risk—a Separate Share Trust may suffice. But if one or more heirs runs a high-liability business or faces potential long-term care costs, a Preservation Trust likely offers superior peace of mind.

Real-World Examples That Illustrate the Difference

Example 1: Sarah Protects Her Three Children

When Sarah, a widow in Ohio, passed away at age 75, she left $1.8 million of diversified investments. Concerned about her son Mark—then involved in a contentious divorce—and her daughter Jessica—who ran a high-growth retail business—Sarah established three Separate Share Sub-Trusts upon her death.

Mark’s Sub-Trust: Because Mark’s divorce could drag on for years, his inheritance stayed shielded. Even if a court awarded half of his community property to his ex-spouse, the sub-trust remained out of reach.
Jessica’s Sub-Trust: Facing potential creditor claims in her retail business, Jessica’s share sat safely in its sub-trust. She received quarterly distributions for living expenses but could never withdraw the principal outright.
Youngest Child’s Sub-Trust: Their daughter, a teacher with no liability concerns, could invest her share more aggressively yet still enjoy protection against unexpected lawsuits.

Five years later, Jessica requested to decant her sub-trust into a Preservation Trust. She was in her early 40’s, raising three kids, and wanted to add provisions for educational expenses and disability income protection. By decanting:

She named her brother as successor trustee if she became incapacitated.
She streamlined tax reporting by using a grantor trust.
She added language to allow distributions for home modifications if she faced long-term care.

Outcome: Sarah’s original plan protected each beneficiary’s inheritance. Jessica’s move to a Preservation Trust gave her more autonomy without sacrificing asset protection.

Example 2: John & Mary Secure Their $5 Million Family Business

John and Mary, founders of a mid-sized manufacturing firm worth $5 million, wanted to ensure their two children and five grandchildren benefited from the business while staying protected:

Separate Share for Each Child: Upon their passing, each child’s share flowed into a Separate Share Trust. That trust contained language to support each child plus future distributions to grandchildren for college expenses.
Long-Term Protection: Ten years in, their son filed for bankruptcy after a separate investment went south. Since his inheritance was in a Separate Share Trust, his creditors couldn’t touch the principal. Instead, he received quarterly distributions for family support.
Preservation Potential: Their daughter, an attorney with high liability exposure, eventually converted to a Preservation Trust. She consolidated her funds, named her spouse as Distribution Trustee, and added bespoke language giving her spouse discretion to continue business investments if she became disabled.

Key Lesson: Even a $5 million family business can unravel if one beneficiary loses everything to liability claims. By building a trust structure, John and Mary guaranteed those assets would protect not just their children but also grandchildren yet to come.

When to Choose a Separate Share Trust

A Separate Share Trust typically makes sense if:

You have multiple heirs with similar liability profiles. If none of your children face imminent divorce or high-risk business exposure, standardized protection may be enough.
You want to keep drafting costs modest. Since the trust terms don’t change per beneficiary, legal fees often run lower than fully tailored trusts.
You accept ongoing tax filings. You’re comfortable with an annual Form 1041 for each sub-trust—or a consolidated filing—despite compressed trust tax brackets.

Why It Works:

You establish firm distribution standards (education, health, or general welfare) across all sub-trusts.
You name a distribution trustee who is unrelated—ensuring a true firewall between the beneficiary and potential creditors.

Red Flag: If your heir faces a lawsuit or divorce right now, limit exposure even further by considering a Preservation Trust immediately (or plan on decanting down the road).

When to Opt for a Preservation Trust

A Preservation Trust (or decanted trust) tends to be the right fit if:

A beneficiary already navigates high liability risks. Professionals in medicine, law, or real estate can face sudden lawsuits. A grantor trust under their SSN simplifies tax reporting while blocking creditors.
You want to give heirs maximum control. They can redesign trust terms, update distribution criteria, and name successor trustees without revisiting your original estate documents.
You care about tax efficiency. When a trust’s net income exceeds $13,000–$14,000 (2025 thresholds), it hits the highest trust tax bracket. A grantor trust passes that income through at potentially lower individual rates.

Why It Works:

Decanting lets beneficiaries transfer assets into a brand-new trust, maintaining distribution flexibility while preserving asset protection.
The grantor trust status avoids compressed tax brackets—beneficiaries keep more of the trust’s earnings.

Red Flag: Preservation Trusts require more sophisticated drafting by an attorney experienced in advanced asset protection. Upfront legal costs may run 20–30% higher than a simple Separate Share Trust. However, those costs can pale in comparison to potential losses from litigation, divorce, or long-term care expenses.

The Cost-Benefit Equation

If you wonder whether spending $5,000–$7,500 on legal fees makes sense, consider this:

Cost of a divorce settlement. If one child divorces a spouse seeking half of their inheritance, you could lose hundreds of thousands—if not millions—in a single judgment.
Potential lawsuit judgment. Liability claims from accidents, malpractice suits, or business disputes often run six or seven figures. Without a trust, your family’s inheritance sits unprotected.
Nursing home look-back rules. If a beneficiary transfers funds to heirs without shielding, Medicaid looks back five years. Their inheritance could force them to spend down to zero before qualifying.

Putting your assets into an irrevocable trust costs a fraction of what you could lose by leaving them exposed. For most families, preserving even half of $500,000 in inheritance easily offsets the initial drafting fees.

Common Questions and Misconceptions

“Why not just use a Will?”
A will goes through probate. Even if you specify conditions, the court cannot bar creditors or a divorcing spouse from seizing assets. Without a trust, you effectively hand beneficiaries a stack of cash to be spent or litigated over.

“Can I name my child as both Beneficiary and Distribution Trustee?”
No. To maintain a legal firewall, distribution trustees must be unrelated: no parents, spouses, siblings, or descendants. You can name a best friend, cousin, or a professional advisor—just not the beneficiary themself.

“What if a beneficiary moves to another state?”
Irrevocable sub-trusts remain valid across state lines. However, state-specific asset protection laws vary. If your heir moves from Ohio to Florida, for instance, Florida’s Spendthrift Trust statutes may offer even stronger protection. Discuss these nuances with an attorney.

“Is decanting inevitable?”
Not necessarily. If you know your beneficiaries have complex situations now, it’s often better to draft Preservation Trusts from the outset. Decanting provides flexibility later—but it requires a separate legal process.

“How do I pick a Distribution Trustee?”
Choose someone with no conflict of interest, who understands fiduciary responsibilities, and who is willing to serve. Popular options include:

Close family friends
Attorneys or CPAs (though they charge annual fees)
In-laws or cousins (if no blood relation)

How to Decide: A Simple Roadmap

Assess Liability Risks.

Does any child run a business prone to lawsuits?
Is anyone going through or likely to face divorce proceedings?
Are long-term care costs a looming concern?
If yes to any, lean toward a Preservation Trust (or plan to decant).

Evaluate Tax Considerations.

Will trust-level tax rates swallow more than 20% of net investment income?
If so, a grantor trust (Preservation Trust) keeps rates lower.

Determine Desired Control.

Want uniform terms across all heirs? Separate Share Trust may be simpler.
Need bespoke distribution standards, successor trustees, or investment oversight? Preservation Trust wins.

Estimate Legal Budget.

Upfront cost of Separate Share Trust: typically $3,000–$5,000.
Upfront cost of Preservation Trust: $5,000–$8,000 (due to advanced drafting).
Ongoing tax prep for Separate Share: $500–$1,000 per sub-trust.

One Clear Action: Secure a Consultation Today

If you’re serious about protecting your legacy, the time to act is now—before life’s uncertainties strike. We recommend scheduling a complimentary, no-obligation call with an experienced estate planning attorney who understands Ohio’s asset protection laws and federal tax codes. During this call, you will:

Assess your family’s unique liability profile.
Compare Separate Share vs. Preservation Trusts in the context of your estate size.
Get a tailored road map to set up the right trust strategy step by step.

Click here to book your free consultation and gain the confidence of knowing your heirs receive protected wealth, not unshielded cash.

Conclusion: Build a Fortress for Your Family’s Future

You’ve worked too hard to let a single lawsuit, divorce, or nursing home bill dissolve your family’s wealth. By choosing the right irrevocable trust structure—whether a Separate Share Trust or a more customizable Preservation Trust—you put legal walls around your assets that last for generations.

Transcript: Prefer to Read — Click to Open

Ted (00:00.078)

Are you worried about what happens to your hard-earned assets after you’re gone? Did you know that 70 % of inherited wealth disappears by the second generation and 90 % is gone by the third? That’s right. Most families lose their legacy within just a few decades. But what if I told you there’s a way to protect your assets from creditors, lawsuits, divorces, and even nursing homes? Not just for you, but for generations to come.

Today I’m going to reveal two powerful trust strategies that can shield your family’s wealth for decades. Separate shared trust and preservation trust. I’ve helped hundreds of Ohio families protect millions in assets using these exact strategies. And by the end of this video, you’ll understand exactly how they work and which one might be right for your situation. Before we dive in though,

Let me clarify something important. Both separate shared trusts and preservation trusts are irrevocable trusts. Sometimes they’re called sub trusts. This means once they’re established, they can’t be easily changed or revoked. But that’s exactly their superpower. This irrevocable nature is precisely what provides protection from creditors, lawsuits, Medicaid,

bankruptcy, and divorce. Let’s start with separate share sub-trusts. Imagine you have three children and you want to leave each of them an inheritance. But you’re concerned about what might happen to that money if one of them gets divorced, gets in a car accident, and faces a lawsuit, or needs nursing home care later in life. A separate share sub-trust creates individual accounts for each beneficiary

while providing crucial protection. Instead of giving your assets outright or directly to your children, where they’d be vulnerable to life’s financial disasters, you place them in separate protected accounts or sub-trusts. Each beneficiary gets their own individual trust managed independently based on their unique needs and circumstances. This could be for education, medical expenses,

Ted (02:26.838)

or just general financial support. Here’s how it works. The separate share sub-trust is established under a trust agreement designed by you, the trust maker. The terms are typically basic in nature. There’s no specific successor child trustee named in the document if the beneficiary becomes incapacitated or dies. Also, the beneficiary distribution standards and any powers of appointment are limited

to those included in the original trust agreement. What makes this structure powerful is the two-trustee system. Your beneficiary serves as the management trustee of this sub-trust, deciding where to invest the funds. They work alongside a distribution trustee, oftentimes one they appoint, who acts as a firewall between the beneficiary and any creditors. Again, typically,

you’re going to allow your beneficiary to appoint this distribution trustee. The distribution trustee has no significant liability exposure and doesn’t need to know the financial specifics like account details or amounts. One important restriction, if not specifically named by the original trustmaker, distribution trustees must be non-related, non-subordinate parties. In other words,

They cannot be grandparents, parents, siblings, children, or grandchildren. However, they can be a best friend, in-law, cousin, aunt, or uncle. A beneficiary can also appoint an attorney, CPA, or financial advisor as distribution trustee, though professionals typically charge an annual fee. For tax purposes, separate shared trusts are non-grantor trusts.

This means you’ll need to obtain an EIN and file an IRS form 1041 each year to report trust income once the sub-trust is created. If distributions were made, the beneficiary would receive a Schedule K1 to add to their personal return and pay any tax owed at their tax rate. If no distributions were made, the separate shared trust will pay taxes

Ted (04:51.836)

at a compressed tax rate. Now, let’s talk about preservation trusts and how they differ from separate share trusts. I oftentimes say, think of them as separate share trust 2.0 with more flexibility and control and greater tax benefits. A key advantage of preservation trusts

is that beneficiaries can actually decant their separate shared trust into a preservation trust. What does decant mean? Just like pouring wine from one bottle into another to leave behind the sediment, decanting a trust means transferring assets from one trust into a new trust to change the terms. This allows beneficiaries to maintain control while gaining added protection and flexibility.

Preservation trusts are established and administered under a trust agreement designed by the beneficiary, not the original grantor or trustmaker. This means the terms can be tailored to the beneficiary’s current situation. Successor trustees can be named by the beneficiary in the trust agreement. For tax purposes, preservation trusts are grantor trusts as to the beneficiary.

This means beneficiaries can use their social security number, allowing trust income to be reported on the beneficiaries IRS form 1040, rather than filing a separate trust tax return as you do with a separate shared trust. This simplifies tax reporting and potentially reduces the overall tax burden. Let me give you a real world example of how these trusts work.

I recently helped a client named Sarah to set up her estate plan. Sarah had accumulated significant assets over her lifetime and had three adult children. She was concerned about her son Mark, who was going through a contentious divorce, and her daughter Jessica, who had recently started the business, with significant liability exposure. Instead of leaving her assets directly to her children, Sarah established

Ted (07:12.931)

separate share sub-trusts for each of them as a part of her trust. So when Sarah passed away, her assets flowed into these protected sub-trusts. Mark’s inheritance remained completely shielded from his divorce proceedings. His soon-to-be ex-spouse couldn’t touch a penny of it. Jessica’s inheritance was protected from any potential business creditors or lawsuits as well.

Later, Jessica decided she wanted more flexibility with her trust. She worked with an attorney to decant her separate share sub-trust into a preservation sub-trust. This allowed her to name her sister-in-law as a distribution trustee and customize the trust terms to better fit with her current needs while maintaining all the asset protection benefits. Now you might be wondering.

Which trust is right for my situation? Here’s a simple way to think about it. Choose a separate shared trust if you want to provide basic protection for your beneficiaries with standardized terms. This works well when you want to establish the same basic protections for multiple beneficiaries without a lot of customization. But consider a preservation trust, or simply allow your beneficiaries to decant.

to one later if you want maximum flexibility, customization, and tax efficiency. This is ideal when beneficiaries have complex situations or when you want to give them more control over their inheritance while maintaining protection. Remember, both trust types provide protection from creditors, lawsuits, Medicaid, bankruptcy, and divorce. The main difference is

lie in flexibility, control, and tax treatment. One question I often get is, can’t I just leave everything to my children and my will? Well, you certainly can, but here’s what happens. Those assets become completely vulnerable. If your child gets divorced, their spouse might get half. If they’re sued, creditors can take everything. If they need nursing home care, they’ll have to spend down those assets.

Ted (09:38.782)

before qualifying for Medicaid. By using protected sub-trusts, you’re not just giving your children an inheritance. You’re giving them protected wealth that can last for generations. Think of it as the difference between handing someone cash that can be easily lost or stolen versus giving them a secure vault that keeps their wealth safe no matter what happens. Another common question is about cost.

while setting up these trusts does require an initial investment. Consider this, the cost of establishing a trust is typically a tiny fraction of the assets you’re protecting. Would you spend $5,000 to protect $500,000 or more? Most people would say that’s an excellent investment. Let me share another quick example. I had clients, John and Mary, who had built a successful family business

worth several million dollars. They had two children and five grandchildren. They established a separate share sub-trust for each of their children with provisions that would continue to protect those assets for their grandchildren. Ten years later, their son experienced a business failure and filed for bankruptcy. Because his inheritance was in a protected sub-trust, those assets remained completely safe from creditors.

He was able to use distributions from the sub-trust to support his family during this difficult time, while maintaining the principle for future generations. This is the power of proper trust planning, protection that spans generations and weathers life’s financial storms. Separate shared trusts and preservation trusts both provide protection for multiple beneficiaries while maintaining control

over how assets are distributed. However, preservation trusts offer more flexibility, customization options, and better tax treatment. Separate share sub-trusts are non-grantor trusts requiring separate tax filings, while preservation trusts are beneficiary grantor trusts that can use the beneficiary Social Security number for tax reporting. The choice between these trusts

Ted (12:01.576)

depends on your specific situation, goals, and how much flexibility you want to give your beneficiaries. If you’re serious about protecting your legacy for generations to come, I strongly recommend working with an experienced estate planning attorney who specializes in these types of sub-trusts. Every family situation is unique, and your trust strategy should be tailored to your specific needs and goals. Well, if you found this information helpful,

Please hit the like button and subscribe to our channel for more estate planning insights. In our next video, we’ll be discussing how to use these trusts specifically for retirement accounts, a topic you won’t want to miss if you have significant IRA or 401k assets. Thank you for watching and remember, the time to repair the roof is when the sun is shining. Don’t wait until it’s too late to protect what you worked so hard to build.

Click the video on your screen now to learn about the three legal documents everyone needs to make sure their medical wishes are followed. Another critical piece of your comprehensive estate plan. Thanks for being with us today.

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