By Amy Hsiao
As a parent, you’re likely hoping to leave your children an inheritance. In fact, doing so may be one of the motivating factors driving your life’s work. But without taking the proper precautions, the wealth you pass on is at serious risk of being accidentally lost or squandered. In some instances, an inheritance can even wind up doing your kids more harm than good.
Creating a will or a revocable living trust offers some protection, but in most cases, you’ll be guided to distribute assets through your will or trust to your children at specific ages and stages, such as one-third at age 25, half the balance at 30, and the rest at 35.
If you’ve created estate planning documents, check to see if this is how your will or trust leaves assets to your children. If so, you may not have been told about another option that can give your children access, control, and airtight asset protection for whatever assets they inherit from you.
In our planning process, we always offer parents the option of creating a Lifetime Asset Protection Trust for your children’s inheritance. A Lifetime Asset Protection Trust safeguards the inheritance from being lost to common life events, such as divorce, serious illness, lawsuits, or even bankruptcy.
But that’s not all they do.
Indeed, the best part of these trusts is that they offer you—and your kids—the best of both worlds: airtight asset protection AND use and control of the inheritance. What’s more, you can even use the trust to incentivize your children to invest and grow their inheritance.
Contrary to what you might think, Lifetime Asset Protection Trusts are not just for the super wealthy. Indeed, these protective trusts are even more useful if you’re leaving a relatively modest inheritance because they can be used to educate your children about how to grow your family wealth, instead of quickly blowing through it.
And without such guidance, most people blow through their inheritance very quickly. In fact, one study found that, on average, an inheritance is totally gone in about five years due to debt and poor investment. Another study found that one-third of people who receive an inheritance actually had a negative savings within just two years.
Not to mention, the smaller the inheritance, the more at risk it is of getting wiped out by a single unfortunate event like a medical emergency.
Regardless of how much financial wealth you have (or don’t have), if you plan to leave your kids anything at all, you should do everything you can to make it more likely that they grow what’s left behind, instead of losing it. This way, your resources can have a truly beneficial effect on their lives—and even the lives of future generations.
A Lifetime Asset Protection Trust can achieve each of those goals and so much more.
Most lawyers will advise you to put the assets you’re leaving your kids in a revocable living trust—and this is the right move. But as mentioned earlier, most lawyers would structure the trust to distribute those assets outright to your children at certain ages or stages.
And if you’ve used an online do-it-yourself will or trust-preparation service like LegalZoom®, Rocket Lawyer,® or any of the newer options frequently coming online now, you will most likely be offered only two options: outright distribution of the entire inheritance to your kids when you die, or partial distributions when they reach specific ages and stages as described above.
Either of those options leaves their inheritance—and your hard-earned and well-saved money—at risk. Indeed, once assets pass into your child’s name, all of the protection previously offered by your trust disappears.
For example, say your son racked up debt while in college, which can sometimes happen. If he were to receive one-third of his inheritance at age 25, creditors could take his inheritance if it's paid to him in an outright distribution.
The same thing would be true if your daughter gets a divorce after receiving her inheritance, only it would be her soon-to-be ex-spouse who would claim a right to the funds in a divorce settlement. And despite what you may have heard about an inheritance remaining separate property, once it’s in your child’s hands, outright and unprotected, those assets are at risk.
There’s just no way to foresee what the future has in store for your kids—these kind of events happen to families every day. And that’s not even taking into consideration that your kids might simply blow through the money and spend it all on unnecessary luxuries.
Lifetime Asset Protection Trusts are specifically designed to prevent your hard-earned assets from being wiped out by such risks. And at the same time, your children will still be able to use and invest the funds held in trust as needed.
For example, even though the assets are held in trust, your kids would be able to invest those funds in things like stocks, a business, or real estate, provided they do so in the name of the trust. Plus, if your child needs to pull money out to pay for college, a new home, or medical bills, they can do that by asking a Trustee—who’s chosen by you to oversee the money—for a distribution.
Or, as will cover next week, you may even allow your child to become Sole Trustee at some point in the future, allowing him or her to make decisions about the trust’s management.
Obviously, creating a trust like this requires significant understanding of how to properly draft the trust, so don’t attempt to do create one without our guidance. And as you’ll see next week, Lifetime Asset Protection Trusts offer additional benefits that can be used to teach your kids how to invest and grow their inheritance, so that the assets you leave behind can be passed on to their children and beyond.
Proper estate planning can keep your family out of conflict, out of court, and out of the public eye. If you’re ready to create a comprehensive estate plan, contact us to schedule your Family Wealth Planning Session. Even if you already have a plan in place, we will review it and help you bring it up to date to avoid heartache for your family. Schedule online today.