How to Protect Your Heirs and Your Legacy from Bad Decisions and Outside Influences
Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance to protect your heirs isn’t as hard as you might think. – Suze Orman
After working diligently for decades to achieve your financial goals, you understandably want to preserve your gains, leave an enduring legacy to the next generation, and protect your heirs, from predators, creditors, and
often from themselves. For better or for worse, though, your heirs have free will. Even while you’re alive and very much capable of directly communicating with your children, favored charities and others, you might already be uncomfortably familiar with the limits of your influence.
As you contemplate the future, it’s easy to ponder disagreeable scenarios. What if your adult child squanders the business you leave her by getting involved with a dubious partner or burning through cash reserves and taking speculative risks? What if your child engages in high risk activities, or falls victim to substance abuse? What if the non-profit that you co-founded mismanages the property that you leave it or runs afoul of legal issues?
Your carefully outlined plans for passing money onto the next generation can be derailed in many ways:
- · A widowed spouse remarries unwisely;
- · An unanticipated or unforeseen tax consequence drains the estate;
- · A chronic illness or lengthy nursing home stay disrupts the plan;
- Substance abuse or other harmful habits such as gambling
- Undue influence from a spouse, girl friend, boy friend, or a child
- · An aggressive creditor, fraud, financial mismanagement, or some other unfortunate act undoes your hard work and creates a complicated, expensive, dramatic mess for your family.
In this post, we will explore a solution to the problem of how to best pass along your financial legacy an protect your heirs, so that you can breathe easier, feel more comfortable with your options, and provide much greater benefits to your family members and heirs.
The good news is that you’re not the first to deal with this anxiety. For centuries, people who have accumulated meaningful assets have wrestled with how to protect your heirs and exert control over the next generation in an effort to avoid the needless dissipation of those accumulated assets. As a result, they and their advisors have developed quite an expansive toolbox to protect your heirs.
This “insider secret of the wealthy” we are about to discuss is strategic as well as tactical. But before we dive in, I want to share what is the more common planning option. In many estate plans, inheritances are given to heirs staggered (such as one-third at age 25, one-third at age 30, and the rest at age 35) or outright with no strings attached. This approach seems straightforward and therefore sensible. But, staggered or outright distributions are less than ideal because they leave your heirs’ inheritance vulnerable to interference from creditors, predators, and courts.
So what can and should be done, instead to protect your heirs?
Here’s one powerful answer: Leave an inheritance in a discretionary lifetime trust, rather than outright or staggered.
What is a discretionary trust?
Depending on how it’s implemented in your circumstances, this type of trust lets you pass assets along to beneficiaries now or at your death. As the name implies, you give the trustee discretion over how and when the beneficiaries may access trust assets. Certain uses of the money might be deemed acceptable, whereas other uses will be restricted.
For instance, if your daughter wants to go to medical school, or your son wants seed money to launch a business, then the money is available. However, if your child (or other beneficiary) veers off path or violates the terms and conditions you incorporate into the trust, then the assets are not available. With proper planning and a good choice of trustee, the funds you set aside can last for your beneficiaries’ whole lives and beyond.
How Does This Tool Shield and Protect Your Heirs Inheritance?
First of all, the discretionary lifetime trust cordons off the inheritance. A vengeful ex-spouse, a plotting business partner, an unshakeable creditor, or an unreasonable plaintiff (‘s lawyer) in a lawsuit against your beneficiary, all will have a very hard time breaking down the wall that you have established surrounding the property and assets you’ve left for your loved ones. No wall is completely impenetrable, but this one is as strong as any allowed by law to protect your heirs.
The trustee that you have chosen and left in charge of the assets has the power to go inside this wall, according to your explicit and pre-determined instructions, guidelines and wishes, and access the funds for your designated family members, at the levels and for the purposes you have established in the trust document. But the “bad guys” are generally kept at bay.
You can also ensure that whatever is “left-over” in the trust after a beneficiary dies goes to whomever you want, whether that be future generations of your family, your favorite church or charities, or perhaps your alma mater. You get to make those choices. You could stipulate that what’s left should be passed to a grandchild, a sibling, or a cherished organization. In this way, you can develop a series of discretionary lifetime trusts and ensure your legacy for decades or longer. This also lets you enshrine your standards and values by imposing them as conditions on the benefits.
You can also empower the trustee to proactively help beneficiaries. For instance, if the trustee notices that your son (sadly) has become an alcoholic or inveterate gambler who cannot be trusted with an allowance, she can be given the discretion to deny or limit the flow of benefits to him and instead use trust funds on his behalf (say to directly pay rehabilitation, rent, or other expenses).
Of course, there are numerous other benefits to discretionary trusts, ranging from estate and income tax planning to proactively passing along financial values.
Although a long-utilized and popular tool for the wealthy, this type of trust has helped protect your heirs for countless people across the entire wealth spectrum, from the modest to the well-to-do. In many cases, it can help your family too.
You probably have many questions about lifetime discretionary trusts. We’re here to help. Please call us today, so we can explore how we can help you protect your heirs, preserve the assets you have accumulated and help your family enjoy and appreciate what you have done for them.