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 neither squandered or 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 bequeath, 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. A trust also protects the trust maker and the beneficiaries from the public process of probate. Anyone can research probate court records and determine how much your estate was worth, what you owned and how you chose to divide it.
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, wedding, or medical needs.
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 or trust. 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. In the event, your child, who may have an addiction problem like gambling, drugs, or overspending, may require trustee oversight to temporarily end the distribution of trust or IRA monies until they demonstrate wellness. At that time, the trustee may opt to restart money distributions.
Another vehicle with some overspending controls specifically for retirement accounts is a Standalone Retirement Trust (also known as an IRA Trust). Instead of designating individuals as beneficiaries, a retirement account (IRA, Roth IRA, 401(k), etc.) will designate the standalone retirement trust as the beneficiary. The retirement trust will establish lifetime beneficiaries such as a surviving spouse, as well as contingent beneficiaries such as children or grandchildren. That way, the people you want to inherit the benefit of your retirement account can still do so without a worry that contingent life circumstances interrupt your plan and dissipate the financial gift you are trying to leave them. This is true whether your intended beneficiary is a spouse (who could be susceptible to undue influence or subjected to lawsuits) or a child or grandchild is too young to manage an inherited retirement.
Ultimately it is best to find a trusted estate planning attorney that is well versed in the laws of California to help you craft a comprehensive approach to the dispersion of your estate that will protect your intentions from the mal-intent of others. Whether you need a lifetime “dynasty” trust, individual trust or direct inheritance, institutional trustee, a retirement trust 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. Please contact us or schedule a meeting should you need some guidance. We are happy to help.
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Kevin Snyder is a husband, father, and an Orange County estate planning attorney at Snyder Law, PC in Irvine, California. He’s all about family and passionate about estate planning, elder law, and veterans. He founded Snyder Law to help people be prepared and have the peace of mind they are protecting their families and aging parents for when life happens.