Having teenage daughters, I helplessly watch as these teenage boys ring my front doorbell to pick up their date on Saturday nights. Not fondly remembering what I was like as a 17 year old, I pray that the boy taking my daughter out to dinner and a movie drives responsibly, acts gentlemanly and gets her home at a reasonable hour. My daughters are strong-willed, responsible kids who have cell phones they know they can use to call me at anytime – but there’s still that feeling of losing control that every parent has experienced.

And I know that it will only get worse. Soon they’ll be in college – on some campus far from home. Then they’ll move away (hopefully) to get a job of their own. My daughters will get married and have their own family.  Through each one of these life cycle events I’m sure that my protective instincts won’t diminish.

I see it with many of my clients.  Their children are grown adults, yet they worry about protecting the inheritance that they’re leaving behind. They ask me a simple, yet loaded question: “How do we safeguard the hard-earned assets that our children will inherit from us?”

In order to answer that question, I need to know what dangers they foresee. Even successful children experience issues that mandate protecting inheritance. The physician daughter has to worry about a malpractice claim against her. The businessman son may be in litigation with a former partner over a business transaction. Maybe the inheritance you leave your children will exacerbate their own estate tax planning.

Some may be worried that their children (or their son-in-law or daughter-in-law) have spendthrift habits that will quickly diminish their inheritance? Worse, are they concerned that a son-in-law or daughter-in-law is only waiting for the inheritance to come through before divorcing the child and seeking a large settlement in the divorce proceedings?

Due to the bad economy, does the child have a lot of creditors? Is the son underwater on his mortgage? Has daughter been living off of credit cards? Do they have an IRS problem?

All of these are potential threats to a child’s inheritance. The list goes on and on. Parents know this. The worries never end. And – we’ll take our fears to the grave won’t we? That’s part of the job description.

So what do you do in your estate plan? The worst thing that you can do is to direct an outright distribution to your children. Once the children own the assets you leave them, generally speaking those assets will become subject to the claims of a creditor, predator or divorcing spouse.

The better way to leave the assets is to leave them in a continuing, testamentary trust for each child. Testamentary, by the way, means ‘after death’.  So your will or revocable trust will create inside of it another trust – typically dividing your estate into separate trust shares for each child. That way, the children are not tied to one another and the actions of one will not affect the other.

Some of you may believe that a continuing trust is a bad idea because you or someone in your family may have had a bad experience with one. Perhaps a bank was named as trustee and that bank was a real problem to deal with. They charged high fees, investment returns lagged the market indexes and they never seemed to want to make a distribution to the beneficiaries.

Most of these problems are a result of a trust document that names a bank as a trustee and does not give anyone the ability to fire the bank and to hire a new trustee. So the problems I describe here are very easily avoided. If your child is responsible, you can name the child as the trustee of his or her own share. We need to be cautious in so doing, because if your goal is to protect the child’s inheritance, if the child is the sole trustee of his or her own share then a court could direct the child to make a distribution from the trust to satisfy a creditor.

But this problem can also be dealt with – there are a number of options. You could name a “friendly” trustee as a co-trustee with the child who is not also a beneficiary of the trust. You can even give your child the opportunity to name a special independent trustee if a creditor problem arises.

If your child is part of the problem, however – such as with a spendthrift child – you may want to name a third party trustee such as a bank or trust company. There are many good banks and trust companies that do a fabulous job for their clients. But just as your family can always hire and fire attorneys, accountants and investment advisors, when naming a bank or trust company in the trust document it is important to give someone you trust the ability to fire and rehire another institution.

So you can help protect your children. Even from the grave! Now if only I could fire that boy who just rang my front doorbell!

©2012 Craig R. Hersch

From time to time I travel with my family over to the east coast of Florida where my wife’s parents and brothers reside. Each of my wife’s two brothers has three girls. So when you add my three daughters to the mix, my mother-in-law and father-in-law have 9 granddaughters and no grandsons!

Our family just doesn’t make boys I guess!

So my daughters and several of my nieces piled into our SUV to go watch a movie. My brothers-in-law and their wives were busy so I had a good day with the kids. But have you seen how much they charge for a movie these days? And we went to an IMAX movie as well – which is about double the price that they charge for a normal flick. Then you add in the popcorn and sodas – the bill was as much as if we went to a premium steak house. But it’s all good –the cousins love spending time together.

Sometimes you end up paying for others when they’re not really your own, and obviously that’s part of the price of being in a family together. But other times it comes up unexpectedly. Like in your estate plan. Today I’m going to show you how you might have beneficiaries lurking in your plan who ready to inherit some part of your bounty – even if they’re not named in your legal documents.

The cast of characters include:

Uncle Sam – If you don’t plan ahead to take advantage of the income, estate and gift tax laws to their fullest, Uncle Sam may have a hand in your pocket that he otherwise might not have had. While those with enormous estates usually won’t get by without having to pay some level of tax, Uncle Sam’s reach into your pocket might be deeper than it truly has to be.

State Taxing Authorities – Like Uncle Sam, the states are imposing more and more taxes on all sorts of things. With planning and forethought their share of the estate can be mitigated if not eliminated.  

Your Spouse – While many intend for their spouses to be beneficiaries of their estates, in second marriages especially this may not be true. You both may have entered the marriage with “what is yours will go to your family and what is mine will go to my family.”  This may or may not happen depending upon how you construct your estate plan, and whether you formalized your mutual understanding in an agreement. Without a formal, legal agreement, it is quite possible that your spouse is entitled to receive as little as 30% of your estate or as much as 50% (or more) depending upon a variety of factors.

Your Son-in-Law/Daughter-in-Law – What you leave your children will benefit them for the rest of their lives and then what is left will go on to your grandchildren. Or will it?  Without building protective elements into your plan, it is conceivable that your son-in-law or daughter-in-law will enjoy more of the inheritance you left your children than you had planned.

Your Illegitimate Grandchild – I once had clients who failed to tell me that their son had an illegitimate child when their son was a young man. I imagine that was something that they may have been embarrassed over or didn’t want to talk about. Unfortunately the son predeceased his parents. Parents’ wills gave predeceased son’s share to his children, per stirpes. Thank goodness it wasn’t too late before the clients finally told me about the illegitimate grandchild.  Guess who the per stirpes distribution would have included had we not changed the documents?

A beneficiary you thought you disinherited – Suppose you want to disinherit a beneficiary that is now included in your estate plan, replacing him or her with someone else. If you bring that someone else to your lawyer’s meeting with you, even if they didn’t have any influence over your decisions – there may be a presumption that they did influence you. In such an event, your disinherited beneficiary may be able to nullify your new estate plan after your death.

The bank trustee that can’t be changed – Unlike your lawyer or your accountant, both of whom your family can choose to fire if they feel that their fees for the proposed estate administration are unreasonable, if you have named a bank trustee and have not included provisions allowing for someone you have confidence in to remove and replace the bank – then the bank can charge whatever they deem appropriate for their services. Make sure that your document contains removal and replacement provisions for anyone or any institution that may be serving as your personal representative or trustee unless you believe that the beneficiaries themselves are more dangerous.

The charity you signed a pledge for but didn’t include in your plan – Sometimes people make pledges to include a charity in their estate plan. Years go by, and the pledge may be forgotten, or deemed not as important as it once was. If you made such a pledge and subsequently did not include the charity in your plan, the charity may have legal recourse against your estate. Charitable institutions can sue your estate for a pledge if they reasonably relied on it and made budgets, allocations or other noteworthy gestures in reliance on your pledge. While many charities won’t go so far as to litigate, more are enforcing their rights.

These are just a few of the possibilities. It’s almost like a movie in and of itself, worthy of a soda and a big tub of popcorn. Enjoy the show!

©2012 Craig R. Hersch