Wealth Planning News
Vol. VI, No. 6
If you love someone you should consider protecting their inheritance for them from losses to potential catastrophic creditors and from predators such as their divorcing spouses. You may do this by giving them the inheritance in trusts for their benefit. Yet like most of us you want to give each loved one the right to manage and invest inherited assets along with the right to give themselves distributions as needed or desired by them, rights that may be called the dignity of control.
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.
The traditional approach used by most attorneys has been to advise clients to give the inheritance in stages based on attainment of certain ages, such as one-third at age twenty-five, another distribution at thirty, and the reminader at thirty-five.
This traditional approach reflects knowledge of risks of dumping any significant amount into the hands of a loved one. But our experience shows that certain risks continue far beyond the normal ages mentioned above.
Our recommended solution is a lifetime trust for each loved one, with them having the dignity of control at an age they may be presumed able to handle such a responsibility.
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.
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.
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.
Some Actual Examples
1. We once had a couple with around $2 Million they wanted to give to their two daughters. They signed a living trust to do that, leaving each daughter her share in a lifetime asset protection trust and giving each daughter the full dignity of control after age thirty. The couple attended a church that had a normal lawyer as another member. This church friend lawyer offered to review the couples' trust free of charge and had them cancel the trust and make Wills, leaving the estate to the daughters outright, after he told the couple the trust was terrible because it "tied up their inheritance for their entire lifetime." What it really did was free the inheritance from creditor and predator claims, but this idea was foreign to such a lawyer. Later the couple died and each daughter inherited about $1 Million outright. The youngest daughter's husband thereafter had an anuerysm that burst, leaving him hospitalized for a month before he died with no medical insurance because he was between jobs, and so lost his prior employer provided insurance. Under state law his spouse was liable to pay for his living needs, thereby making her liable for his nearly $1 Million of medical and hospital bills. Thanks to the 'free' lawyer from her parents' church this daughter lost her inheritance that would have been protected for her in the original trust the lawyer had them terminate.
2. Parents left an inheritance to a son who bought an expensive new home. He put it into joint tenancy with his wife, thereby converting it to marital property. The wife later divorced him taking half of the home equity, which was half of his total inheritance.
3. Mom deeded her farm to a daughter who died from cancer, leaving the farm to the son-in-law who soon remarried a younger woman with children from a prior marriage. The new wife will outlive the son-in-law and her children will likely inherit all or most of the farm that should have gone to mom's own grandchildren.
4. Another divorced lady inherited a farm from her mother. The farm had been owned by family members for over 100 years. The divorced woman had a teenage daughter who drove her mom's Jeep and caused a horrible accident in which two couples in the other vehicle sustained extremely serious injuries resulting in lifetime disabilities. As owner of the Jeep and parent of its driving, who had died in the accident, the mother was liable to these injured parties when they sued for millions. The mother had a million dollar umbrella policy but it provided for reduced limits of only $500,000 if the daughter drove mom's vehicles instead of her own car that mom had provided for the daughter. Result: The inherited family farm was lost to creditors. Had the farm been in a lifetime asset protection trust it would still be there for the one who had inherited it.
5. A few years ago the daughter of clients who had left their estate to their descendants in lifetime asset protection trusts brought her best friend for a meeting. The friend had inherited her parents' home and other assets. The friend was married to a man who persuaded her to put the inherited assets into joint ownership with him in order to allow for loans to get more favorable interest rates. Shortly thereafter the husband, who coincidentally was a lawyer, found a girlfriend and sought a divorce. The divorce case resulted in a Judge's ruling that the friend of our client had been converted to marital property subject to division in the divorce case. The friend consulting us was in tears as she related how awful it was for her to see her former husband and his girlfriend drive past her home on their way to her own parent's house that she had inherited but lost in the divorce. Of course, we had to tell her it was too late to help her get the protection her mom and dad could have given to her had they been told how to do it.
The Dignity of Control
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.
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.