For those of us who are parents, worrying about our children is a lifelong occupation. One of the worries that clients talk to us about when we’re advising them about their estate plan is their fear that the inheritance they leave to their children will be taken by their children’s creditors or by a spouse in a divorce proceeding or will be lost to their children’s poor money management or reckless spending. These are valid concerns. A Consumer Reports article said that in most cases 80% of inherited wealth is spent within 10 years. A study conducted at Ohio State University found that a person’s wealth decreases by 77% as a result of divorce. Other ways to lose an inheritance include lawsuits, a failing business, bankruptcy and medical expenses. As a parent, what can you do? Well, the good news is that you can protect the inheritance you will leave for your children through your own estate plan. The key is to leave your estate to your children in trust rather than outright. You can give your children as much (or as little) control over their trust share as you wish. For example, you can make your child the sole Trustee of his trust share and give him the right to make distributions to himself for his ‘health, education, maintenance and support.’ On the other end of the spectrum, you can appoint a bank or professional trust company as Trustee and grant that independent Trustee complete discretion as to whether or not to make distributions to your child. Giving a third party control over discretionary distributions will provide the best creditor protection for the trust assets, however granting a third party control over the funds may be unappealing. There are a myriad of options in between those two such as appointing your children as co-Trustees of each other’s shares or giving your child the right to remove and replace a Trustee. The important takeaways from this are: 1) you are right to be concerned about protecting your children’s inheritance, and 2) there is something you can do about it.
If you want to learn more about this, stay tuned for information about a workshop Samuel, Sayward & Baler LLC will be presenting for clients and their guests on this topic in the spring.