Wealth Planning News
Vol. IV, No. 4
Disinherit A Loved One?
If you love someone you should disinherit that loved one. Not totally, but just enough to give the loved one control of the inheritance without having to put it into his or her own name.
How To Do It
Your documents can have provisions for the share of a child to be held in a protective trust after your death. Here are the goals:
1. Give maximum dignity of control to your descendants, while you
2. Promote personal responsibility for them and for anyone they marry, and
3. Protect the estate for them, for as many generations as possible, from:
A. Their disability, inability, inexperience, or lack of initiative if they receive too much too young.
B. Their own risk of loss to catastrophic creditor claims, meaning lawsuits in our litigious society.
C. Predators in our society, such as divorcing spouses of your descendants, or spouses of your descendants who survive your descendants and remarry someone outside of your family.
D. Death taxes on all amounts that you can make tax-free when you die, for as many generations as you can keep the original amounts and any of their growth in value free from death taxes. (Tax protection is merely a side benefit.)
4. Avoid guardianship proceedings for remote descendants who may be disabled or too young to receive their inheritance on termination of trusts you have created for the benefit of parents of such remote descendants.
A protective trust is a wonderful gift of love that you make to your descendants. It gives them more freedom than they would have if the assets went to them outright, because they have control without risk of loss to creditors and predators.
Experience teaches that a young person who receives a substantial inheritance often does what a young person does with a substantial recovery in a lawsuit, or with lottery winnings. They spend it quickly. Even the average cash lottery winner is back in the same financial condition as before after only a couple of years.
Imagine that a descendant of yours marries and receives an inheritance during his or her twenties. What effect would complete control of that inheritance have on the initiative and ambition of your loved one? Would the loved one be as willing to complete formal education, or formal job training, or engage in the hard work needed to start a business or embark on a career? Would whoever married that descendant of yours lose some ambition, or otherwise take advantage of your descendant's inheritance, using it up and then letting your descendant live later years of relative poverty? Would the spouse of your descendant possibly divorce your loved one, and end up with part of the inheritance you intended to go only to your family member? The answer to these questions is yes in each case, as shown by the experience of most families.
In This Issue
1. Disinherit A Loved One
2. How To Do It
3. Why Bother?
4. The Dignity of Control
Now imagine that a descendant of yours is a professional person who has worries about possible loss of assets to people who might sue for malpractice, or for other claims arising out of the professional practice.
Or imagine that a descendant of yours is sued for sexual harassment, breach of contract, outrageous conduct, or because of ownership of some assets that produce liability.
Or imagine that your descendant may go through a later divorce (more than a 50-50 chance).
Or imagine that your descendant gets into a business, where he or she has to sign notes to start up and run the business, and is exposed to litigation that arises out of business ownership.
Would you like to protect the inheritance from being lost if any of these things happen? Most people who ask themselves these questions want to protect the inheritance if they can do it in a way that gives their loved ones dignity of control at a specified age. In fact, it is a thoughtful gift of love to provide that asset protection for your loved ones.
The Dignity of Control
These protective trusts can allow descendants (except as you otherwise specify) to act as trustees of their own shares at a set age you specify, and to remove and appoint other co-trustees or separate trustees. The use of these protective trusts gives maximum dignity of control to your descendants. In other words, these trusts protect the inheritance for your descendants, not from your descendants.
The right to act as trustee includes the right to decide how to invest the inheritance.
The right to act as trustee includes the right to decide how to use, distribute, and spend the income and even the principal of the trust for their “health, support and maintenance,” standards that are quite flexible.
As a practical matter there is little that the descendants could not do with the inheritance except lose it to someone who might sue or divorce them, or might take advantage of them during early years when they are not serving as their own trustee.
The child and later descendants of each child would have the right to say who gets any remainder of their individual trust shares at death. They can specify whether the remainder will pass outright or in trust. They can specify who receives it, except as limited by you. If you choose to make sure the inheritance for each of your children will forever remain in your family, the protective trusts could specify that any remainder must pass down only to your descendants. This type of protective trust is sometimes called a dynasty trust. The inheritance that might pass to your later generation descendants (grandchildren and even their descendants) could go into a similar trust for these descendants.
Wealthy families have used these trusts for years. Your family is worth the effort. After all, less than a large inheritance is even more valuable to loved ones who are not wealthy.