Utilizing Testamentary Trusts

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Many clients are concerned about the son-in-law and daughter-in-law divorcing their child and walking away with a big chunk of their estate. And why shouldn’t they worry? The divorce rate in America is unfortunately still at a very high level. Parents also worry that someone will target their kids for get-rich-quick schemes, foolish financial investments, or even some well-planned scam. There is the real prospect that your kids could get sued for any sort of civil action and a judgment creditor could walk off with your estate. There is also the situation where a parent isn’t so sure their child could handle inheriting a large amount of money and be left to their own devices.

When you give the inheritance outright to your children after you’re gone, there is nothing you can do to protect those assets or your children. The assets are fair game once control passes from the parent’s estate into the hands of the children. Yet almost every estate plan drafted the traditional way delivers the assets straight into the hands of the children regardless of whether the child is ready for that wealth or not. This is what is commonly referred to as Divide, Dump, and Dissipate. This may conjure images of little Johnny buying that new Maserati instead of smartly investing his money to save up to buy a house.

How can parents make sure that their children do not foolishly waste their inheritance? One option is to provide for a testamentary trust in their Wills. Trusts may make you think of the Rockefellers of the world, but in fact they are a commonly used planning instrument. Say Jane and Joe have 2 kids, ages 21 and 23. Between them, Jane and John have a $1 million estate, with life insurance and retirement accounts included. Hopefully this will continue to grow, but say Jane and John pass away today. With their current estate plan, their two children will each receive $500,000 directly into their bank accounts. Now the children are free to use their inheritance on anything they so choose. The money will also be subject to any divorce proceeding or creditor judgment that may come up in the future.

If the parents provided for a trust to hold the money until the children reached a certain age, say 35 years old, along with an Independent Trustee to make distributions to the children when prudent, the money would be fully creditor protected, which means it would not be subject to divorce judgments or creditor judgments. The Independent Trustee should be a party that shares the parents’ philosophies concerning money management and should be someone that they trust to do the right thing.

Utilizing testamentary trusts is a simple and worthwhile way to ensure that the money you want your children to use in bettering their lives is actually used for that purpose. To discuss this and your other estate planning goals further, contact the attorneys at The Wladis Law Firm.

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