“Henry” recently visited with me. “I love my son in law as if he was my own son,” he began, “but my daughter’s marriage to him has been rocky at times, and I’m worried that when I die he’s going to take the inheritance I leave my daughter. What can be done to ensure that what I leave behind benefits her?”
I suggested that Henry consider leaving the amounts to his daughter in further trust as opposed to an outright distribution.
“I don’t want her to beg for her inheritance though. My aunt was left a trust and had to beg the bank every time she needed money and it was HER money,” Henry said.
“That situation might come true if you name a bank or trust company as the only trustee, and give that bank full discretion over when you daughter gets income or other assets from the trust. But what I’m suggesting is to make your daughter her own trustee, or perhaps name a friendly co-trustee with her. While naming a bank or trust company might give your daughter professional management over the trust, I would suggest if this is what you want to give your daughter or some other person the ability to remove and replace the bank or trust company. But in any event, you can always name your daughter as the only trustee of his or her share.” I replied.
“But if she’s her own trustee, won’t she have the ability to do whatever my son-in-law asks?” Henry worried. “What if he wants her to invest in the next big internet company and she blows it all?”
“That’s always a possibility if she has full discretion over the trust funds,” I answered. “This goes to how much you trust your daughter. You were going to give her the money outright before anyway. By leaving it to her in a trust that she controls you can protect the inheritance you leave her from creditors, predators and even divorcing spouses.”
“How does that work. If she has control won’t the assets be subject to those dangers?”
“The more control you give her, certainly the more likely creditors will be able to attack the assets. But by taking some preventive measures, such as naming an independent co-trustee, or naming her children (your grandchildren) as co-beneficiaries who may also be entitled to income you can better protect the trust assets. When there are other discretionary beneficiaries, your daughter will, as trustee, have a duty to protect the trust assets for their benefit as well.”
“But even so, my daughter’s rights to the trust will be mandatory, right? In other words, I want all the trust income to be distributed to her.”
“Well, if she is the trustee, she can determine when it’s best to make distributions from the trust. So I might suggest that you make your daughter a discretionary beneficiary as well.”
“If we make her kids as a current beneficiary, when they get older can’t they demand trust money from her? I want her to have enough for her retirement and not necessarily give it all to the grandkids.”
“We can build language into the trust that indicates your primary intent is your daughter. You can also give your daughter something known as a ‘power of appointment’ so that she can dictate where the trust assets are distributed when she dies. There are several ways to limit your grandchildren’s ability to make demands on their mother.”
After several more minutes of give and take on this issue, Henry decided to leave his daughter amounts in trust as opposed to an outright distribution. There are other benefits to doing this, as I’ll point out in later columns.
©2009 Craig R. Hersch