If you pass away, your loved ones should not inherit assets only to find that…
Estate planning for the future inheritance of your children and grandchildren should include protective measures to keep assets from disappearing or being claimed by a creditor. A simple way to achieve inheritance protection is through a trust. A trust can pass your wealth bypassing probate. This allows specific trust provisions to ensure the money left to a beneficiary is not immediately mismanaged, squandered or lost through ill-advised spending, or divorce action of the beneficiary.
Divorce is one of the primary obstacles to contend with when trying to minimize issues of wealth transfer and preservation. High divorce rates, especially among aging Americans, can make an inherited trust vulnerable if the property becomes commingled with the marital estate. Single and married children, as well as grandchildren of inherited wealth, should always maintain inherited assets and property as a separate entity whether as a trust or direct individual inheritance. Before any marriage, a pre-nuptial agreement should be signed to protect previously inherited wealth and the potential of future inheritance.
Whether your child or grandchild inherits an existing trust or establishes their trust after a direct bequest, the terms of the trust can limit the potential problem of future loss of inherited monies or assets due to the possibility of lawsuits and creditor claims. A properly drafted trust can protect assets from legal action in the event your child is sued, (which would include an action for divorce or collection for unexpected medical expenses).
A trust also protects the trust maker and the beneficiaries from the public process of probate or administration. Any member of the general public can research Surrogate’s court records and determine how much your estate was worth, what you owned and how you chose to divide it. The implications of such discovery may sometimes prove dire for the Estate and the beneficiaries.
If you believe your adult child has limited aptitude to manage money properly and might squander your grandchildren’s inheritance, then draft a will or trust that earmarks a dollar amount or percentage of the estate for those grandchildren explicitly. As an example, the will or trust can also specify that these inherited assets be allocated solely for a grandchild’s college education or wedding. Appointing a third party as an Executor or Trustee under the Will and the Trust, respectively, will further help ensure the Testators (in a Will) and Settlors (in a Trust) protect their assets until those are ready for distribution.
Another financial vehicle with some overspending controls is a “stretch IRA.” This inherited individual retirement account (IRA) has a required minimum distribution (RMD) that stretches over a more extended period based on the inheritor’s life expectancy. A monitored minimum distribution will allow the principal to continue growing. In the case a child or grandchild is too young to manage the RMDs it may be in their best interest to name an institutional trustee to direct distributions.
Whatever your intent is for your grandchildren, be sure to include a discussion with your child, expressing your resolve for your grandchildren to inherit and clearly stating them in your will. Also, speak honestly about your fears that your child may blow through their inheritance and discuss the value of limiting annual distributions to only investment income or a percentage of the trust’s value to preserve the aggregate of assets. This may be especially pertinent in the event your child may have an addiction problem like gambling, drugs, or overspending. You might want to require trustee oversight to temporarily end distribution of trust or IRA monies until the child demonstrates wellness. At that time, the trustee may opt to restart money distributions.
Ultimately it is best to find a trusted estate planning attorney that is well versed in the laws of your state to help you craft a comprehensive approach to the dispersion of your estate that will protect your assets from the malicious or misguided intent and actions of others. Whether you need a lifetime “dynasty” trust, individual trust or direct inheritance, institutional trustee, inheritable stretch IRA, or a combination of inheritance vehicles, is all dependent on your unique financial position and personal desires for your legacy’s distribution. There is great latitude when drafting the structure for the distribution of your estate, so look to creative inspiration to open up possibilities.
Contact our office today by calling (212) 920-6371 and schedule an appointment to discuss how we can help you with your planning.
TAGs: will, trust, estate, inheritance, assets, IRA, trustee, executor, beneficiary, dynasty, planning, retirement