Wilson Law Group is glad to present a series of blog posts on Family Planning by Attorney Matthew Underwood
Why Your Responsible Children Need Their Inheritance in a Trust
Many parents believe that their “responsible” children do not need the protection of a trust. After all, if your child is good with money, why do they need their inheritance placed in a trust?
A trust can provide five main protections that won’t be present if you give assets to your children outright: (1) creditor protection, (2) predator protection, (3) divorce protection, (4) self-protection, and (5) estate tax protection. We will address each of these protections in turn.
You may be saying to yourself, my child is responsible with money, so she doesn’t have creditors. Even responsible children with very little existing debt could use creditor protection for their inheritance. What happens if your child gets into a car accident and gets sued? Imagine that a judge finds your child responsible for the accident. All of a sudden, all of your child’s assets, including her inheritance, becomes fair game. However, if you left your child’s inheritance to her in a properly drafted trust, the inheritance would be off limits in the lawsuit.
Why would a responsible adult child need predator protection? Think about what would happen if your child meets someone, it could be a boyfriend or girlfriend, or even a spouse. If the child owns her inheritance outright, a significant other could convince your child to start making distributions to this new person. Further, imagine if your child starts to slip mentally or becomes incapacitated. Your child would then become very susceptible to predators trying to get your child’s inheritance. A trust can provide the protection of co-trustees, who can stand along with your child to make sound decisions.
In Wisconsin and other community property states, it is assumed that anything owned or acquired during a marriage belongs equally to each spouse. If your child is married and later gets divorced, your child’s ex-spouse could suddenly be entitled to half of your child’s inheritance. On the other hand, if you left your child’s inheritance to her in a properly drafted trust, all of your child’s inheritance would be protected for her and her heirs.
For a responsible child, self-protection may not be a big issue. But if your child is not good with money, self-protection is very important. You do not want to leave your assets to a child who will go out and spend their inheritance within a couple weeks of receiving it. A trust can provide for a child’s health, education and other basic needs, while preventing your child from spending their inheritance irresponsibly.
And if your child suffers from addiction, you certainly don’t want to leave assets to them where it could be used to buy drugs or alcohol, or be lost gambling. A trust can provide care for your children who suffer from addiction while keeping it off limits from fueling your child’s addiction.
Estate Tax Protection
Estate taxes become an issue if you are leaving a lot of assets to your child, or if your child is successful and will accumulate a lot of assets over her lifetime. Leaving assets to your child outright could subject your child’s estate to unnecessary taxation, and leave less for future generations to inherit. You child’s taxable estate could be subject to a 40% tax, payable within nine months of her death.
By leaving assets to your child in trust, the trust assets could be kept separate from your child’s estate. Even if your child is very successful and has a taxable estate, the trust you leave to your child can be set-up to avoid taxation and can pass on to your grandchildren and other beneficiaries without being subject to the 40% estate tax, thus creating an amazing legacy.
Even the most responsible children deserve some level of asset protection against creditors, predators, ex-spouses, and taxation. A comprehensive trust can accomplish these. An experienced estate planning attorney can help you determine how to leave assets to your beneficiaries in a way that will accomplish your goals and provide for your loved ones, with protection.