The vast majority of estate planning clients want their estates to pass to their family. Tremendous time and energy is spent to reduce the Internal Revenue Services’ share of the estate and thereby maximize the amount passing to the beneficiaries. But the IRS may not be the only stranger who will end up with a share of your estate. If you estate plan is not properly designed, the property that you worked so hard to accumulate may end up in the hands of your ex-son- or daughter-in-law.
If a child received his or her inheritance from your estate as an outright distribution and commingles the funds with marital assets, it is possible that, as a result of a divorce, some or all of the inheritance will wind up in the hands of the child’s ex-spouse. With half of all marriages ending in divorce, there is at least a 50% chance that one or more of your children may get divorced after your demise and your child’s inheritance may de divided in a property settlement agreement. For most of our clients, making their children’s inheritance “divorce proof” has become a very high priority.
Any outright distribution from your estate to a child runs the risk of ending up in the hands of the child’s creditors or an ex-spouse. Rather than an outright distribution, we encourage our clients to leave their children’s inheritance in trust. The trust is designed to give the child maximum flexibility and control over assets held in trust for his or her benefit, while protecting the assets from the child’s creditors, including an ex-spouse. The trust generally provides for payments of income and principal to the child in the discretion of an “independent” trustee. The child can be a co-trustee of his or her trust with the power to appoint and replace the “independent” trustee.
Further, if the trust were set up to be exempt from generation-skipping taxation, upon the child’s demise, the assets in the trust will not be part of the child’s estate for tax purposes and thus escape a potential estate tax of up to 55 percent in the child’s estate. Finally, if the trust gives the child a power of appointment, the child will have the power to determine how the trust property is distributed among his or her descendants. Thus, the child could have control of when and how the assets of the trust are held or distributed among his or her descendants.
Is your child one who, if he or she received a substantial inheritance as an outright distribution, would invest the proceeds, keep the income that was generated, dip into the principal only for special needs, and decide how the property will be distributed to their children? If so, your child(ren) should receive his or her inheritance in a well designed trust arrangement that gives the child these same rights but protects the assets from a creditor or an ex-spouse.
