King & Wood, P.A.

Planning to Protect Your Children’s Inheritance: Asset Protection

“You've worked hard for your wealth. Don't let it fall into the wrong hands. Consider prenups, trusts and other protections to safeguard your family legacy.”

No one likes to think about the possibility of losing a lifetime of earnings through unfortunate events like divorce, spendthrift heirs, or litigation. However, ignoring these risks won’t prevent them. A recent article from Kiplinger, “Want Your Kids to Inherit? You Need an Asset Protection Plan, ” explains several asset protection strategies used to protect wealth from disappearing in nefarious ways.

Prenuptial agreements aren’t the most welcoming topic when your adult child announces their engagement. Still, this should be discussed and encouraged no matter how much you love your prospective new family member. A prenuptial agreement or prenup is a contract between two adults agreeing on how they will distribute assets in case of divorce. This legally binding document addresses assets, debts, spousal support, alimony, gifts and inheritances. It’s also helpful as a supporting document if one of the spouses should die unexpectedly. However, the couple should have a will, power of attorney and other estate planning documents created as soon as they are married.

Depending on the state, there may be laws concerning when the prenup is signed for it to be valid. Signing a prenup under duress could make it invalid, so this needs to be addressed in a timely manner.

Another option is to create a postnuptial agreement (postnup). Spouses may contractually agree to terms outlining the distribution of assets in the event of a divorce after the wedding.

Asset protection includes determining and formalizing how assets will be passed on to heirs. Parents should consider creating trusts as part of their estate plan. Trusts allow grantors (the person creating the trust) a much higher degree of control over who receives the assets in the trust and takes them out of the probate estate.

For example, the trust may call for a beneficiary to receive a portion of their inheritance at ages 30 and 40 and the balance at age 50. An heir with a drug dependency might be required to complete a rehabilitation program or maintain employment over a steady period of time before the trustee can distribute some or all of the assets in the trust.

If assets are left through a will, a number of vulnerabilities are created. First, they are part of the probate estate and subject to federal and state taxes. Second, the will becomes a public document when it goes through probate, so creditors can learn if someone is receiving an inheritance. Creditors may include ex-spouses, credit card companies and financial institutions.

An experienced estate planning attorney is familiar with the tools used to protect assets and ensure that they pass to the next generation according to your wishes. Protecting a lifetime of hard work is a worthy endeavor, creating a legacy and providing security for those you love.

Reference: Kiplinger (Nov. 9, 2024) “Want Your Kids to Inherit? You Need an Asset Protection Plan”

Inheritances When Unequal Is Actually Fair

“There are times when it makes sense to leave more to one child than another.”

One of the cornerstones of estate planning for most families is to leave equal shares of inheritances to ensure fair treatment among siblings. However, equal shares aren’t always fair, especially when circumstances are complicated. In some cases, giving children equal inheritances is the worst option, according to a recent article, “How to avoid potential conflict among your kids when leaving an unequal inheritance” from MarketWatch.

Data from the University of Michigan’s Health and Retirement Study reveals that the proportion of parents over 50 who reported treating children unequally in their wills jumped from 16% to nearly 35% between 1995 and 2010.

Leaving unequal inheritances can be risky. Many American households report that their future financial stability depends upon receiving an inheritance.

When are parents likely to leave unequal inheritances? If one sibling is struggling financially and the other is flush with income and good fortune, it may be the right thing to do. This may also apply if one child has already received a large amount of financial support or has special needs.

One of the most common reasons for leaving unequal inheritances is to address uncompensated caregiving from an adult child. Two-thirds of respondents in a Merrill Lynch and Age Wave study said children who provided care late in life should receive a larger inheritance than those who did not.

Can you prevent conflict between siblings when inheritances are unequal? It is difficult, but worth a try:

Explain your wishes. Have a family meeting or one-on-one meetings with children to explain your thinking, and if necessary, consider including your estate planning attorney in the discussion. Consider writing a heartfelt, handwritten letter if you’re uncomfortable or the family dynamic is explosive. This may also help you if your will is contested in court, since it will demonstrate your intent.

Add a deterrent. If you anticipate your family ending up in court over their inheritances, talk with your estate planning attorney about a no-contest clause, which would be inserted in your will. It states that anyone who contests the will forfeits the right to any inheritance. Just be careful—these clauses are not interpreted the same way in every state. Therefore, consult with an experienced estate planning attorney to be sure that your will and your wishes will withstand a court challenge.

Consider a trust as part of your estate plan. Consider using a trust if your concern is focused on using your assets, as in the case of a spendthrift child or one with addiction issues. Your assets are placed in the trust, and you name a trustee to be in complete control of when and if the assets should be distributed to the named beneficiary. For example, you could set up an educational trust to preserve assets to be used for school costs. In the case of blended families, a trust can also be used to provide funds for a spouse but not children from a prior marriage. Trusts are harder to challenge because they bypass probate and remain private, unlike wills.

Reference: MarketWatch (May 6, 2023) “How to avoid potential conflict among your kids when leaving an unequal inheritance”

Why are Trusts a Good Idea?

“Whether you are trying to protect your assets from possible creditors, prevent young heirs from spending their inheritance or minimize estate taxes, there is likely a trust for you.”

Estate planning attorneys know trusts are the Swiss Army knife of estate planning. Whatever the challenge is to be overcome, there is a trust to solve the problem. This includes everything from protecting assets from creditors to ensuring the right people inherit assets. There’s no hype about trusts, despite the title of this article, “Trusts—What Is The Hype?” from mondaq. Rather, there’s a world of benefits provided by trusts.

A trust protects assets from creditors. If the person who had the trust created, known as the “grantor,” is also the owner of the trust, it is best for the trust to be irrevocable. This means that it is not easily changed by the grantor. The trust also can’t be modified or terminated once it’s been set up.

This is the direct opposite of a revocable or living trust. With a revocable trust, the grantor has complete control of the trust, which comes with some downsides.

Once assets are transferred into an irrevocable trust, the grantor no longer has any ownership of the assets or the trust. Because the grantor is no longer in control of the asset, it’s generally not available to satisfy any claims by creditors.

However, this does not mean the grantor is free of any debts or claims in place before the trust was funded. Depending upon your state, there may be a significant look-back period. If this is the case, and if this is the reason for the trust to be created, it may void the trust and negate the protection otherwise provided by the trust.

Most people use trusts to protect assets for future generations, for a variety of reasons.

The “spendthrift” trust is created to protect heirs who may not be good at managing money or judging the character of the people they associate with. The spendthrift trust will protect against creditors, as well as protecting loved ones from losing assets in a divorce. The spouse may not be able to make a claim for a share of the trust property in a divorce settlement.

There are a few different trusts to be used in creating a spendthrift trust. However, the one thing they have in common is a “spendthrift clause.” This restricts the beneficiary’s ability to assign or transfer their interests in the trust and restricts the rights of creditors to reach the trust assets. However, the spendthrift clause will not avoid creditor claims, unless any interest in the trust assets is relinquished completely.

Greater protection against creditor claims may come from giving trustees more discretion over trust distribution. For instance, a trust may require a trustee to make distributions for a beneficiary’s support. Once those distributions are made, they are vulnerable to creditor claims. The court may also allow a creditor to reach the trust assets to satisfy support-related debts. Giving the trustee full and complete discretion over whether and when to make distributions will allow them to provide increased protection.

A trust requires the balance of having access to assets and preventing access from others. Your estate planning attorney will help determine which is best for your unique situation.

Reference: mondaq (Aug. 9, 2022) “Trusts—What Is The Hype?”

What Is Better, a Trust or a Will?

“Preparing an estate plan for managing and distributing your assets in the case of death is one of the most important steps you could take to protect and provide for loved ones.”

Estate plans come in all sizes and shapes. One of the decisions in creating an estate plan is whether a trust should be part of your plan, as detailed in this recent article titled “Trust vs. Will: What They Share (And 6 Ways They are Different)” from Yahoo! Money. Both trusts and wills give control over how assets are distributed. However, there are differences.

A trust is a tool for asset protection during and after life, created by an estate planning attorney. When the trust is created, assets are transferred into the trust, which is a legal entity. If it’s a revocable trust, typically you are the grantor, trustee, and beneficiary. There are also other roles, like the successor trustee, who is the trustee if the primary is incapacitated and the beneficiary, the person who receives the assets. The trustee is a fiduciary and responsible for managing the assets for the best interest of the beneficiary.

There are many different types of trusts, but they mainly fall into two categories:

Revocable or living trusts allow the grantor full control of the trust. The trust assets are outside of the probate estate. Revocable trusts can be changed, assets may be added and beneficiaries can be changed. However, there’s no protection from creditors and no unique tax benefits.

Irrevocable living trusts transfer assets upon death without going through probate. They provide stronger asset protection. Assets in an irrevocable trust are not accessible to creditors and, depending on how they are set up, may place assets outside of the taxable estate.

There are also many specialized trusts. A Special Needs Trust is used to care for a person with special needs, while maintaining their government benefits. A spendthrift trust can be used to leave assets for people who aren’t capable (or interested) in managing funds responsibly. Trusts provide significantly more control over assets after death than wills. They may also be harder to contest after death, since they go into effect while you are living and may remain in effect for many years.

Wills are used to provide specific directions about how you want to distribute assets upon your death. The will goes through probate, where the court determines if the will is valid, if the executor is acceptable and then the will becomes part of the public record. Creditors can make claims against the estate, family members may challenge the will and depending upon where you live, it could take many months or several years to settle the estate.

How are trusts and wills different?

1—Trusts can be more complex than wills and require management. The will goes into effect upon your death, and you can change a will whenever you want. You also can change a trust whenever you want, but only if it is revocable.

2—Trusts go into effect immediately and they need to be funded, so you’ll have to transfer assets to the trust.

3—A trust is a separate legal entity, so assets are shielded from estate and inheritance taxes. Certain trusts do pay taxes, so speak with your estate planning attorney about how this may work for you.

4—Certain trusts put assets well beyond the reach of creditors. However, a trust may not be created solely for this purpose, since it could be deemed invalid by a court. However, in most cases, trusts work well to protect assets to pass them along to beneficiaries. A will offers no such protection, unless a “testamentary” trust is created under the will. This will created trust can operate exactly as an inheritance trust created for loved ones after you die and your revocable trust becomes irrevocable.

5—Planning for incapacity should be part of any estate plan. Once a trust is set up and funded, the assets immediately enjoy the protection by having a successor trustee to be in charge of assets if the grantor/trustee becomes incapacitated. A will only addresses what happens after you die, not what happens if you become too sick or are injured and can’t manage your affairs.

6—The trust is the winner when it comes to control over assets after death, if you want to avoid probate. You can instruct the trustee to distribute funds to beneficiaries only under certain conditions and terms. If you want beneficiaries to finish college, for instance, you can direct the trustee to distribute a certain amount of money only after the person completes an undergraduate degree. You can also use the money to pay for their college education.

For most people, a combination of a will and trust works to control assets, prepare for incapacity and, just as importantly, provide peace of mind.

Bottom line: estate planning is complicated, not a do-it-yourself project and should be done with the counsel of an experienced estate planning attorney.

Reference: Yahoo! Money (June 5, 2022) “Trust vs. Will: What They Share (And 6 Ways They are Different”

Benefit Controlled Trust May Be Answer to Protecting Legacy

“Life is messy sometimes. Divorce, bankruptcies and lawsuits happen. They can potentially wipe out the inheritance you’ve carefully set aside for your loved ones. However, there are many trust options to help keep life from ruining your legacy.”

When beneficiaries receive their inheritance in their own names, a legacy becomes vulnerable to creditors, lawsuits, divorce and a second estate tax when they die. Complicating matters further, if the heir receives means-tested government benefits, their benefits may be lost if they receive a direct inheritance.

There is a solution, explains the article “What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone” from Kiplinger. Having each beneficiary’s inheritance go into their own Beneficiary Controlled Trust can protect your legacy. Properly created and funded, the beneficiary may control, use and enjoy their inheritance with less risk than outright ownership. A Beneficiary Controlled Trust protects loved ones from the ups and downs of life. Divorce, lawsuits, creditor claims, bankruptcy are all unpleasant, but they do happen.

A Spendthrift Trust is used for beneficiaries who cannot be trusted to make good financial decisions, or who have people in their lives who can’t be trusted. It’s like a spigot on a garden hose. The trustee decides when the beneficiary should receive access to assets, how much and when.

In a Beneficiary Controlled Trust, the beneficiary can also be the controlling trustee. The beneficiary has the same level of control as they would with outright ownership. They can make investment decisions. Assets, including real property or investment accounts, are owned by the trust.

After inheritance, the primary beneficiary has the ability to alter the level of control or protection, if they are concerned about upcoming risks. If the risk is particularly strong, for example, a contentious divorce, the primary beneficiary may resign as a trustee and appoint a trusted family member or professional to act as a trustee.

Another trust is a HEMS trust, one limited to providing distributions for the beneficiary’s Health, Education, Maintenance and Support. HEMS trusts are used to avoid estate tax. However, in some states, certain creditors, including divorcing spouses or health care providers, are permitted to pierce the trust and access assets.

If the primary beneficiary of a Beneficiary Controlled Trust wishes to enhance asset protection, they can appoint an independent trustee who serves as the distribution trustee. They may make distributions to the beneficiary at their discretion, which can provide another level of protection. The beneficiary may not wish to giver such broad discretion to an Independent Trustee, as in the case of Brittney Spears. This can be minimized by giving the primary beneficiary the right to remove and replace the Independent Trustee. The beneficiary won’t have direct control over the distributions, but they decide who will manage the trust. The person may not be a related party or subordinate person.

Taxes should always be a consideration when creating trusts. Your estate planning attorney should review goals, concerns, and your unique situation to determine which type of trust works best for you and your family.

Reference: Kiplinger (Sep. 13, 2021) “What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone”

How Do I Stop Heirs from Foolishly Wasting Inheritance?

“One of the biggest concerns a trust creator might have is that the beneficiary would squander their inheritance or that the beneficiary’s creditor would attach the inheritance to cover the beneficiary’s debt.”

This is a problem solved by a trust—a “spendthrift” trust. With a spendthrift provision in a testamentary trust created under a will or an inheritance trust created under a revocable living trust, the trustee makes all decisions about distributions. This can be an effective means of controlling the flow of money.

A spendthrift trust, according to the article “Possible to spendthrift-proof a trust” from Record Courier, is created for the benefit and protection of a financially irresponsible person.

For a spendthrift trust, it may be better not to choose a family member or trusted friend to serve as the trustee. Such person might not live long enough or have the capacity to serve as trustee for as long as required, especially if the heir is a young adult. Conflicts among family members are common, when money is involved. An independent and well-established trust company or bank may be a better choice as a trustee. Large estates often go this route, since their services can be expensive. However, some retail banks do have a private wealth division. All options need to be explored.

Another benefit to a spendthrift trust—funds are protected against current or future creditors of the beneficiary. Let’s say a parent wants to leave money to a child, but knows the child has credit card debt already. Unless they are co-signers, the parent and their estate do not have a duty to pay an adult child’s debts. The spendthrift trust will not be accessible to the credit card company.

It is difficult to set up a spendthrift trust to protect one’s own money from creditors. This is something that must be approached only with an experienced estate planning attorney. This is because the rules are complex and there are significant limitations. If you wanted to create a spendthrift trust for yourself, you would have to completely give over control of assets to the trustee. There is no way to predict whether a court will consider the person to have relinquished enough control to make the trust valid.

This type of spendthrift trust may not be created with an intent to defraud, delay or hinder creditors. Doing so may make the trust invalid and any possible protection will be lost.

A spendthrift provision in a will is a clause used to protect a beneficiary from a creditor attaching prior debts against the beneficiary’s future inheritance. This means that the creditor may not force an heir or the estate’s executor to pay the beneficiary’s inheritance to the creditor, instead of the beneficiary. It also prevents the beneficiary from procuring a debt based on a future inheritance.

It is important to be aware that a spendthrift provision in a will or a spendthrift trust has limitations. The assets are only protected when they are in the trust or in the estate. Once a distribution is received, creditors can seek payment from the assets owned by the beneficiary.

Another qualifying factor: the spendthrift provision in the will must prevent both the voluntary and involuntary transfer of a beneficiary’s interest. The beneficiary may not transfer their interest to someone else.

The spendthrift trust and clause are mainly intended to protect a beneficiary’s interests from present and future creditors. They are not valid if their intent is to defraud others and may not be created to avoid paying any IRS debts.

Reference: Record Courier (July 10, 2021) “Possible to spendthrift-proof a trust”

When Should Children Receive an Inheritance?

“Is it better to help your children when you’re still alive? Or wait until after you die?”

Should an inheritance remain an inheritance, given to children only after their parents die, or should parents use some of the money to help their kids out while they are still living? That’s a question that many families grapple with, reports a recent article “When to Give Inheritance Money to Your Kids,” from The Wall Street Journal.

Not every family can afford to give their children an advance on their inheritance, but for those who can, there are some things to consider:

Some financial advisors believe that “gifting with warm hands” is a better way to go. Parents can enjoy seeing their children and grandchildren benefit from having the help, based on when it is needed. Decoupling an inheritance from parental death is a happier scenario than the alternative.

Others believe that current financial needs, taxes and the tax situations of the parents and children ought to be the deciding factor. First, is there enough money for the parents to live comfortably in retirement? That includes being prepared for the cost of an unexpected health crisis that might lead them to need short- and long-term care. Follow that by understanding the tax situation of both parents and heirs. Once those answers are fully formed, then a discussion about gifting can move forward.

Another school of thought is to stop saving every penny and enjoy life to its fullest right here, right now. Some people are more concerned with maxing out their 401(k) plans than enjoying their lives. A healthy balance between protecting assets for later years, creating wealth for the next generation and having some fun too is the goal for many families.

Regardless of how you see your situation, one thing is sure: if you have any concerns about how your children will handle an inheritance, make a gift while you are living. You’ll get to see how they handle it, responsibility or recklessly. This may inform your planning for the future, including the use of spendthrift trusts.

The pandemic has forced many people to confront their own mortality and consider how they really want to spend the rest of their lives, as well as their assets. Many parents are preparing to make changes in their estate and gifting plans to accommodate needs that have arisen as a result of COVID’s economic impact.

Talk with your children about finances—yours and theirs. Discuss their needs, especially if they have been unemployed for an extended period of time. If they need money for something critical, like paying for health insurance or catching up on student loans, the gift should be made with a clear understanding of its intended purpose.

Your estate planning attorney can help create a plan that works while you are living and after you have passed. Trusts may be a strategic plan for sharing assets while you are alive, with some tax advantages.

Reference: The Wall Street Journal (April 30, 2021) “When to Give Inheritance Money to Your Kids”

How Does a Spendthrift Trust Protect Heirs from Themselves?

 

“What steps can be put into place to ensure an adult child, who makes poor decisions, will be secure after the death of the parent? The main asset is life insurance.”

This is not an unusual question for most estate planning lawyers—and in most cases, the children aren’t bad. They just lack self-control or have a history of making poor decisions. Fortunately, there are solutions, as described in a recent article titled “Estate Planning: What to do to protect trusts from a spendthrift” from NWI.com.

What needs to happen? Plan to provide for the child’s well-being but keep the actual assets out of their control. The best answer is the use of a trust. By leaving money to an heir in a trust, a responsible party can be in charge of the money. That person is known as the “trustee.”

People sometimes get nervous when they hear the word trust, because they think that a trust is only for wealthy people or that creating a trust must be very expensive. Not necessarily. In many states, a trust can be created to benefit an heir in the last will and testament. The will may be a little longer, but a trust can be created without the expense of an additional document. Your estate planning attorney will know how to create a trust, in accordance with the laws of your state.

In this scenario, the trust is created in the will, known as a testamentary trust. Instead of leaving money to Joe Smith directly, the money (or other asset) is left to the John Smith Testamentary Trust for the benefit of Joe Smith.

The terms of the trust are defined in the appropriate article in the will and can be created to suit your wishes. For instance, you can decide to distribute the money over a three or a thirty-year period. Funds could be distributed monthly, to create an income stream. They could also be distributed only when certain benchmarks are reached, such after a full year of employment has occurred. This is known as an incentive trust.

The opposite can be true: distributions can be withheld, if the heir is engaged in behavior you want to discourage, like gambling or using drugs.

If the funding for the trust will come from proceeds from a life insurance policy, it may be necessary to have your estate planning attorney contact the insurance company to be sure that the insurance company will permit a testamentary trust to be the beneficiary of the life insurance and avoid probate altogether.

Not all insurance companies will permit this. There may be some other changes that need to occur for this to work and be in compliance with your state’s laws. However, your estate planning attorney will be able to resolve the issue for you.

Reference: NWI.com (May 17, 2020) “Estate Planning: What to do to protect trusts from a spendthrift”