All too often, when clients first approach our office or when we first meet with other professionals such as financial advisors or CPAs, we find that the focus is on anticipated expenses like avoiding probate costs and minimizing taxes. And while those are certainly important endeavors, we’ve found that many people overlook some of the biggest risks to their family—creditors, predators, and divorce. While we’ve touched upon these issues briefly in past newsletters, I thought it was worth taking a deeper dive into them here. With a comprehensive estate plan, parents and grandparents have a tremendous set of tools they can use to protect the assets that they leave to their family.
The Pitfalls of “Traditional” Estate Planning
A typical traditional estate plan might consist of estate planning documents such as a will, a trust, and beneficiary designations that leave clients’ assets to their surviving spouse, and then to their children, outright. The planning might include some basic provisions in case a child is relatively young, such as under 21, but once the child turns 21, any remaining funds are turned over to the child outright.
Potential Risks to Your Child’s Inheritance
What this type of “traditional” estate planning might neglect, however, are the potential risks and “speed bumps” that could come along in your child’s life. Here are a few examples:
- Personal Injury Claim: If your child causes a car accident, or someone is injured in their home, and as a result, your child gets sued, your child’s personal assets, including inherited assets, are at risk to the lawsuit judgment.
- Professional Liability: Depending on your child’s profession, your child may be at risk of being sued for malpractice. At-risk occupations include medical professionals, legal professionals, contractors, builders, architects, business owners, and similar. Without protection, your child’s personal assets, including inherited assets, could be lost in the lawsuit judgment.
- Disability: If your child is injured in an accident or has a catastrophic health event that leaves them disabled, they may be forced to spend nearly all their personal assets (yes, including inherited assets) before qualifying for government assistance for medical care.
- Divorce: Statistics indicate that almost one out of every two marriages ends in divorce. Therefore, your child’s inherited assets could be at risk to a future divorce settlement.
- In-Laws: If your child dies, typically their assets, including anything inherited from you, pass to the surviving spouse—your son-in-law or daughter-in-law. Do you trust—or like—your son-in-law or daughter-in-law enough to give them your child’s inheritance?
The “Old Way” of Planning
With traditional planning, many basic wills and living trusts have been drafted to leave the inheritance to the beneficiaries “outright,” meaning that upon your death, your estate would distribute or retitle assets directly into your children’s (or other beneficiaries’) names. Unfortunately, once your child receives an outright distribution, the assets are exposed to the claims of spouses in divorce, creditors, and lawsuits, and the assets can disqualify your child from receiving need-based government benefits if they are disabled or become disabled after your death.
The “New Way” of Planning: Lifetime Protection Trusts
“Enhanced planning” leaves your beneficiaries’ shares of their inheritance in separate trusts created upon estate settlement, following your death. We call these “Lifetime Protection Trusts” for your beneficiaries. You have the option to allow each beneficiary to control his or her own Lifetime Protection Trust, so they have virtually all the same rights as direct ownership, without the liability exposure of direct ownership.
Now certainly, if you have a troublesome beneficiary, you may need to create some ground rules—a bit of “controlling from the grave”—to protect them from themselves. But if that’s not necessary, you may design the plan so the beneficiary is his or her own Trustee, while still enjoying the protection that the trust provides. As Trustee, the beneficiary can control how the inheritance is invested, how it is distributed, and who receives the remaining inheritance when they die, though many clients opt for a “limited power of appointment,” which requires that the assets stay in the family bloodline (e.g., your grandchildren), while allowing the beneficiary to choose who within the bloodline receives what percentage of the inheritance.
The Benefit of “20/20 Hindsight”
A Lifetime Protection Trust allows your beneficiary to “ramp up” the degree of asset protection provided as needed, with the assistance of third parties. For example,
if your beneficiary is in the midst of a major lawsuit, they can appoint an independent co-trustee who must approve distributions from the trust. Because the co-trustee cannot be forced to approve a distribution, a court cannot require that funds be distributed from the trust and awarded to another party. For an additional level of protection, the Lifetime Protection Trust also permits the appointment of an independent “Trust Protector,” who has the power to “lock down” the Trust even more tightly if it is under attack. In either case, the beneficiary maintains indirect control of the inheritance by influencing who is appointed as co-trustee or Trust Protector.
What Next?
If you’re a past client and did not opt for this protection in your original planning, it may be time to consider an update. (If you’re not sure, you can send an email to
[email protected] and we’ll take a look for you.)
If you haven’t done your planning yet, why not? What’s holding you back? We make this as easy and as painless a process as possible. Give us a call at 919-694-4437 or send an email to [email protected] to discuss next steps.
I hope you’ve found this series helpful. To your health, wealth, and happiness,
