If you are like most parents, you are planning on leaving your children an inheritance upon your death. However, if you handle this incorrectly, the wealth you pass on could be at serious risk of being accidently lost or squandered.
You can create a will or a revocable living trust to try safeguard their inheritance. However, most of the time 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. While this method does grant a little protection, another option that can give your children access, control, and airtight asset protection for whatever assets they inherit from you exists and would be a much better option for your family.
In our planning process, we 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. 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.
Not just for the uber rich
Contrary to common belief, Lifetime Asset Protection Trusts are not just for the amazingly wealthy. These protective trusts are actually 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.
It has been proven that 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.
That’s why regardless of how much financial wealth you have, protecting what your kids do stand to inherit should be of vital importance to you. This way, your resources can have a truly beneficial effect on their lives—and even the lives of future generations.
Not all trusts are created equal
Most lawyers will advise you to put the assets you’re leaving your kids in a revocable living trust—and they would be right. But as mentioned earlier, most lawyers would structure the trust to distribute those assets outright to your children at certain ages or stages.
Similarly, 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 at risk. That’s because once assets pass into your child’s name, all of the protection previously offered by your trust disappears. For example, say your daughter racked up student debt while in college. If she were to receive one-third of her inheritance at age 25, creditors could take her inheritance if it’s paid to her in an outright distribution.
The same thing would be true if your son gets a divorce after receiving his inheritance, only it would be his soon-to-be ex-spouse who would claim a right to the funds in a divorce settlement. 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, because events like these happen throughout life, and that’s not even taking into consideration that your kids might simply blow through the money.
Airtight asset protection—and easy access
Lifetime Asset Protection Trusts are specifically designed to prevent your hard-earned assets from being wiped out by such risks while also allowing your children 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. Furthermore, 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.
As your Personal Family Lawyer®, we can guide you to make informed, educated, and empowered choices to protect yourself and the ones you love most. Contact us today to get started with a Family Wealth Planning Session.
This article is a service of Levi Alexander, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.