By Linda T. Cammuso
Whether your kids are 3 years old or 33, protecting their inheritance from future financial pitfalls may be one of your major goals in the estate planning process. Increasingly, parents are looking to shelter their children’s inheritance from financial threats, particularly from third parties. Divorces, lawsuits, financial exploitation, disability, and substance abuse or other addictions, are just some of the things parents worry about. Perhaps they have already witnessed their child struggle through an event, or they just understand that anything can happen in life. And then of course there is always the concern of impulsive spending, since statistically inherited money is spent at a dramatically faster rate than earned money.
There are a couple very important things to be aware of when it comes to protecting your children’s inheritance.
First, leaving your assets in trust for your children
This step is very easy to do and very effective. Leaving your assets upon your death titled in trust for your children rather than paying outright to them (i.e. rather than naming them directly in the will or as the direct beneficiary of your life insurance, retirement accounts or other investments) can comprehensively protect the inheritance from your child’s future divorce, lawsuit, creditor issues (such as foreclosure or defaulting on a loan) or even just their own poor spending habits. These arrangements are inexpensive to put in place and extremely flexible. You can name anyone to be the trustee of the trust – family, friend or professional. The child can even be a trustee as long as there is a co-trustee named with them. To be clear, this is just language you can add to your estate plan documents to take effect upon your death; it does not involve setting anything elaborate up while you are alive.
Second, the trust language must be precise
The other important thing to understand about trusts and asset protection for your beneficiaries is that it is not enough just to say that the assets will stay in trust when you die. The language must be precise. So many times we have sat down with clients who think a trust they previously set up with another firm will give their kids asset protection, but when we review the language with them see that the trust offers very little if any asset protection. For example, sometimes the children have a right to request/withdraw funds without the trustee’s permission; in that case, any asset they can withdraw would have exposure to third parties. This seemingly-harmless provision is frequently included in people’s trusts as part of the standard or boilerplate provisions. Another provision that is extremely common is the so-called “ascertainable standard” – language stating that the Trustee can make distributions for reasons such as “maintenance”, “support”, “health”, “comfort”, “education”, and the like. These standards of distribution make trust funds vulnerable to creditors, such as a child’s divorcing spouse, who will have a toehold to argue that their claim fits into one of those categories. The good news is that if your trust includes language that could make it susceptible to your child’s creditors, it is usually very easy to amend the trust to replace those provisions with more protective language.
Help for your concerns
As parents, protecting your children is a lifelong job. If you have concerns about your existing trust or you have not set up your child’s inheritance in this manner and would like to learn more about your options an Estate Preservation Law Offices attorney would be happy to help.