There are a myriad of issues that may arise for your children, or other beneficiaries, in inheriting your estate such as taxes, mortgages and other debts, title issues, etc. But more importantly there is liability of your children to judgement creditors or divorce decrees.
You have worked hard over the years to create an estate for yourself and to, hopefully, leave some for your children. But many times, their inheritance may be lost because of a failure to plan. Yes, you have been prudent – you created a Living Trust and properly funded it. You specifically included what each child was to receive. And you signed a Living Trust document that stated they were to receive their inheritance “outright and free of Trust.” What does that mean? It means they are entitled to their inheritance without restraint or limitation. Basically, they are vested in the inheritance. Is that what you really want? What if a child was involved in a lawsuit or had creditor issues at your death? Or, what if a child was in a shaky marriage? Are you aware that your child’s inheritance could be in jeopardy under those circumstances. Also, with no restraints to receiving the inheritance, a Court could order his/her share out of your Living Trust to be distributed to the Court pending the Court proceedings.
Let that resonate for a minute in your thinking. Now, I’ll ask you again. Does leaving your child’s inheritance “outright and free of Trust” sound prudent? I agree, it does not. So, what can we do differently? You may wish to implement my copyrighted PIT provisions that I have developed over the years. In fact, I initially wrote them about 22 years ago after it was reported to my office that children in separate estates had lost their inheritances in lawsuits. One involved a divorce and one involved placing an inheritance in a joint account with the spouse who was eventually sued. Because her inheritance was placed in a joint account with her spouse, she lost it all, $1.5 million.
In implementing my PIT (Protective Inheritance Trust) provisions, we are adding asset protection to your Living Trust. Most experts will tell you a Living Trust cannot be an asset protection document for the creator of the document. And, they are right. Why? Because creators of Living Trusts own the assets they place in the Living Trust. Also, they may remove the asset at any time and enjoy the benefits of the assets. Beneficiaries do not have these characteristics. They do not own the assets, unless they are considered vested, and have no control over the Living Trust assets. During the life of the Creator(s), they have an expectancy. The Creator(s) can always amend the Living Trust and delete the beneficiaries or change their share of the estate. However, the Creator(s) can provide asset protection for the beneficiaries if the drafter of the Living Trust provides appropriate language in the Trust based on Court decisions in this area of the law.
In essence, drafted correctly, a beneficiary is denied his/her inheritance for a period of time if they are involved in, or threatened by, Court proceedings. Additionally, a beneficiary cannot receive his/her inheritance in their own name. We create a legal transfer so as to protect the inheritance from future divorces involving the child.
The PIT involves about a 4 to 5 page amendment to an existing Living Trust and may be included in a new, original Trust. If you, or someone you know, would like to implement this asset protection into your Living Trust, please contact our office at jes@jackstephens.com or call (858) 792-0909. You can also find us at jackstephens.com and on Facebook and LinkedIn at Stephens Law Group.