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Warning: Don’t Let Creditors Inherit from You

Shocking to most people, the retirement account you leave for your spouse can be seized in a divorce, lawsuit, or bankruptcy.

3 Options Available To Surviving Spouses

When your surviving spouse inherits your IRA, he or she generally has three options:

Creditors inherit from you
  1. Cash-out the inherited IRA and pay the income tax.  
    • WARNING! The cashed-out IRA will not have creditor protection and accelerates taxation.
  2. Maintain the IRA as an inherited IRA.  
    • WARNING! The inherited IRA will not have creditor protection.
  3. Roll over the inherited IRA and treat it as his or her own.
    • WARNING! This may offer some creditor protection; however, not in all cases. 

It’s frustrating to many that a stranger can swoop in and take their hard-earned money; fortunately, there’s a solution and that solution is a retirement trust.

Standalone Retirement Trusts Provide Protection

A Standalone Retirement Trust (SRT) is a special type of trust designed to be the beneficiary of your retirement accounts after you die. It can protect your assets from your beneficiary’s creditors.  We can include trust provisions that specifically benefit your spouse in situations such as:

  • Second marriages
  • Divorce
  • Lawsuits from car accidents, malpractice, or tenants
  • Business failure
  • Bankruptcy
  • Medicaid qualification  

Want To Know More? 

The bottom line is that a properly drafted SRT is often your best option for protecting your retirement assets (and providing the bonus of tax-deferred growth). Want to know more?  Contact us today to schedule a conversation. We look forward to working with you.  Contact us today! Call our office at 832.408.0505 or schedule your appointment right now.

What is an Inheritor’s Trust?

When it comes to estate planning there are several types of tools you can use, depending on your circumstances. One such estate planning tool is the trust. There are numerous types of trusts aimed at fulfilling different estate planning purposes. If you are anticipating an inheritance, there is a special type of trust designed to help protect it: an inheritor’s trust.

Purpose of an Inheritor’s Trust

An inheritor’s trust is a trust that has been established for the purpose of receiving a beneficiary’s inheritance in a way that is protected legally and financially. In order to fulfill its intended purpose, an inheritor’s trust must be set up in a way that follows numerous tax and legal rules. Virtually every state in the country forbids what is referred to as a “self-settled trust.” A self-settled trust is an irrevocable trust established by an individual, for his or her own benefit, with the intent to protect the trust assets from creditors. Therefore, once you receive an inheritance, it is very challenging to protect the inheritance assets yourself. Luckily, the inheritor’s trust provides an option for people expecting an inheritance.

Inheritor’s Trust Explained

If you are expecting an inheritance from a loved one, and he or she is unwilling or unable to leave your inheritance in a trust, you can protect these new assets with an inheritor’s trust. However, because you cannot set up the trust yourself because of the “self-settled trust” rule discussed earlier, you will need to work with your loved one to establish the trust. Instead of receiving the inheritance outright, the trust will be the recipient of the inheritance. The trust will typically include a spendthrift clause to protect against creditors, a more drawn out distribution schedule, or provisions granting only discretionary distributions to you. Once the trust has been drafted, your loved one will need to sign the instrument as the creator (grantor) but you will be the beneficiary.

There are several benefits to an inheritor’s trust:

  • The inheritance can be excluded from your taxable estate potentially saving your family estate taxes;
  • The trust can be a more cost effective way to protect the assets instead of your loved one revising their existing plans;
  • Upon your death, the inheritance will be distributed outside of your probate estate which can help ensure privacy and lower attorneys fees and administration costs;
  • The inheritance will be protected from creditors, lawsuits, and divorcing spouses;
  • In some circumstances, the inheritance can even be controlled and managed by you, as a trustee; and
  • You can decide how remaining trust assets will be distributed after you pass away if the trust gives you that power.

An inheritor’s trust is a sophisticated, but powerful estate planning tool. It is ideal for anyone who is to receive a substantial, outright inheritance that may need additional asset and tax protection.

Consult with an Estate Planning Professional

Estate planning can be complicated, but it is essential in protecting yourself and your loved one’s financial future. If you expect to receive an outright inheritance and desire to maintain control, gain superb asset protection, and use all possible avenues to avoid estate and transfer taxes, an inheritor’s trust may be right for you. Call or contact us today to learn about whether this estate planning tool is an option for you.

 

Protecting Your Children’s Inheritance When You are Divorced

Consider this story.  Beth’s divorce from her husband was recently finalized.  Her most valuable assets are her retirement plan at work and her life insurance policy.  She updated the beneficiary designations on both to be her two minor children.  She did not want her ex-husband to receive the money.

sorry rose

Beth passes away one year after her divorce.  Her children are still minors, so the retirement plan and insurance company require an adult to be appointed to receive the inheritance Beth left behind.  Who does the court presumptively look to serve as the caretaker of this money?  Beth’s ex-husband who is now the only living parent of the children.  (In some states, this caretaker of the money is called a guardian, whereas in others it is the conservator.  The title does not matter as much as the role, which is to manage the funds on behalf of a minor, since the minor is not legally able to handle significant assets or money.)

Sadly, stories like Beth’s are all too familiar for the loved ones of divorced people who do not make effective use of the estate planning tools.  Naming a beneficiary for retirement benefits or life insurance, or having a will can be a good start.  However, the complexities of relationships, post-divorce, often render these basic tools inadequate.  Luckily, there is a way to protect and control your children’s inheritance fully.

Enter the Trust

A trust allows you to coordinate and control your estate in a way that no other tool can.  For those who are not yet familiar, a trust is a legal arrangement for managing your property while you are alive and quickly passing it at your death.  There are a few key players in the trust.  First, there is the person who created the trust, often called the Trustmaker, Grantor, or Settlor (this is you).  Second, there’s the Trustee who manages the assets owned by the trust (usually you during your life and then anyone you select when you are no longer able to manage the assets).  Finally, the Beneficiaries are the people who receive the benefit of the trust (usually you during your life, and then typically children or anyone else you choose).

How a Trust Protects Your Children’s Inheritance after a Divorce

A trust protects your children’s inheritance in a few distinct ways:

  1. Since you select the Trustee, you can choose someone other than your ex-spouse to manage the assets.  In fact, you can even state that the ex-spouse can never be a Trustee, if you wish.  If Beth had a trust, she could have named her brother to be Trustee after her death.  Her brother (rather than her ex-husband) would then be in charge of the children’s inheritance.
  2. Since you select the Beneficiaries, you can determine how the trust assets can be used for them.  You may have long-term goals for your beneficiaries, such as college, purchasing of a first home, or starting a business.  When you share your intent, your Trustee can invest the assets appropriately and ensure your legacy is used the way you want, rather than the assets being potentially wasted or used in a thoughtless way.  If Beth had a trust, she could have instructed how she wanted the inheritance used, rather than leaving it to the whims of a court and her ex-husband.
  3. A fully funded trust avoids probate, so your children do not have to deal with the cost, publicity, and delay that is all-too-common in probate cases.  Although “plain” beneficiary designations, like the one that Beth used, also avoid probate, they may still open the door for a guardianship or conservatorship court case, especially when your children are minors.  A fully funded trust avoids these guardianship and conservatorship cases.  This means more money for your intended beneficiaries and less for the lawyers and courts.

If you are divorced, it is essential to make sure your plan works precisely the way you want.  Every situation is unique, but we are here to help design a plan that achieves your goals and works for your family.  Call or contact us today.

Which Life Events Require an Immediate Estate Plan Update?

Estate planning is the process of developing a strategy for the care and management of your estate if you become incapacitated or upon your death. One commonly known purpose of estate planning is to minimize taxes and costs, including taxes imposed on gifts, estates, generation skipping transfer and probate court costs. However, your plan must also name someone who will make medical and financial decisions for you if you cannot make decisions for yourself.  You also need to consider how to leave your property and assets while considering your family’s circumstances and needs.

Since your family’s needs and circumstances are constantly changing, so too must your estate plan. Your plan must be updated when certain life changes occur. These include, but are not limited to: marriage, the birth or adoption of a new family member, divorce, the death of a loved one, a significant change in assets, and a move to a new state or country.

Marriage: it is not uncommon for estate planning to be the last item on the list when a couple is about to be married – whether for the first time or not. On the contrary, marriage is an essential time to update an estate plan. You probably have already thought about updating emergency contacts and adding your spouse to existing health and insurance policies. There is another important reason to update an estate plan upon marriage. In the event of death, your money and assets may not automatically go to your spouse, especially if you have children of a prior marriage, a prenuptial agreement, or if your assets are jointly owned with someone else (like a sibling, parent, or other family member). A comprehensive estate review can ensure you and your new spouse can rest easy.

Birth or adoption of children or grandchildren: when a new baby arrives it seems like everything changes – and so should your estate plan. For example, your trust may not “automatically” include your new child, depending on how it is written. So, it is always a good idea to check and add the new child as a beneficiary. As the children (or grandchildren) grow in age, your estate plan should adjust to ensure assets are distributed in a way that you deem proper. What seems like a good idea when your son or granddaughter is a four-year-old may no longer look like a good idea once their personality has developed and you know them as a 25-year-old college graduate, for example.

Divorce: some state and federal laws may remove a former spouse from an inheritance after the couple splits, however, this is not always the case, and it certainly should not be relied on as the foundation of your plan. After a divorce, you should immediately update beneficiary designations for all insurance policies and retirement accounts, any powers of attorney, and any existing health care proxy and HIPAA authorizations. It is also a good time to revamp your will and trust to make sure it does what you want (and likely leaves out your former spouse).

The death of a loved one: sometimes those who are named in your estate plan pass away. If an appointed guardian of your children dies, it is imperative to designate a new person. Likewise, if your chosen executor, health care proxy or designated power of attorney dies, new ones should be named right away.

Significant change in assets: whether it is a sudden salary increase, inheritance, or the purchase of a large asset these scenarios should prompt an adjustment an existing estate plan. The bigger the estate, the more likely there will be issues over the disposition of the assets after you are gone. For this reason, it is best to see what changes, if any, are needed after a significant increase (or decrease) in your assets.

A move to a new state or country: for most individuals, it is a good idea to obtain a new set of estate planning documents that clearly meet the new state’s legal requirements. Estate planning for Americans living abroad or those who have assets located in numerous countries is even more complicated and requires professional assistance. It is always a good idea to learn what you need to do to completely protect yourself and your family when you move to a new state or country. We are here to help you get fully settled in and build a plan to protect you and your family.

How to Protect Your Child’s Inheritance from His or Her Untrustworthy Spouse

Parents who develop an estate plan often do so to provide for their heirs financially. Many want to make sure hard-earned assets, family heirlooms, or closely held businesses stay within the family. Indeed, a common question is what cost effective options are available to protect one’s children’s inheritance from a spouse in the event of untrustworthiness or divorce. Thankfully, there are many ways to structure your child’s inheritance to help ensure it will remain in the family for future generations. Let’s look at a few of the options now.

Create a Trust

A trust involves three parties: (1) the person creating the trust (you might see this written as the “settlor,” “trustmaker,” or “grantor.”), (2) the person or entity holding the trust property for the benefit of the beneficiary, known as the “trustee”, and (3) the person(s) that benefit from the creation of the trust, known as the “beneficiaries.” Choosing a trustee who is independent can be a great way to eliminate any arguments that one beneficiary has more control to receive assets than what is actually provided in the trust documents than other beneficiaries, a helpful situation when you have an untrustworthy son- or daughter-in-law.

A lifetime trust is a type of trust that – as is evident from its name – lasts for the lifetime of the beneficiary and passes to the next generation of beneficiaries upon his or her death. It is commonly referred to as a “generation-skipping trust” and can also dramatically reduce or eliminate estate taxes. Assets in a lifetime trust are protected against commingling in the marriage and, therefore, cannot be pursued by a spouse. When assets are held by a trust your children – and, by extension, their spouses – cannot access these assets. Therefore, even in the event of a divorce, an ex-spouse cannot pursue them.

Use Prenuptial Agreements

In addition to creating a trust to protect your children’s inheritance from an untrustworthy spouse, your children can use a prenuptial agreement as a tool for asset protection. A prenuptial agreement is a document that details an agreement between your child and his or her spouse about the characterization of assets owned at the time of marriage and those earned after marriage. This legal document also provides the couple to agree upon the division of assets in the event there is a divorce. Because enforceability of prenuptial agreements varies by state, it is important to seek the advice of a legal professional before drafting and signing the contract. It may be an uncomfortable suggestion to bring up with your children, but it can be an incredible benefit in the event of a later divorce.

Other Planning Ideas

Beyond the actual legal tools, it is important for you to let your wishes be known to the family. One way to do this is to have a family discussion about your estate plan, explaining your intentions and reasons as to why it is set up in this manner. Additionally, using clear language in your estate planning documents that specify the intent or purpose in leaving the inheritance to benefit descendants – and not their spouses – can further solidify your wishes are followed. Finally, choosing a trustee that is independent will keep control over the funds in the trustee’s hands and not your child’s untrustworthy spouse. This will also allow you to manage or overcome any conflict that you may not have been expecting.

Bottom Line: Seek Out Estate Planning Help

If you wish to make sure your descendants receive a portion of your estate, discuss these intentions with your children and devise an estate plan that will guarantee this desire is fulfilled after your passing. Whether you have no estate plan, or have one that more than a few years old, sit down with an estate planning professional to create or update this plan to suit your goals.

Call today and find out how to better protect your family.

How You Can Build an Estate Plan That Includes Asset Protection

Much of estate planning has to do with the way a person’s assets will be distributed upon their death.  But that’s only the tip of the iceberg.  From smart incapacity planning to diligent probate avoidance, there is a lot that goes into crafting a comprehensive estate plan.  One important factor to consider is asset protection.

One of the most important things to understand about asset protection is that not much good can come from trying to protect your assets reactively when surprised by situations like bankruptcy or divorce.  The best way to take full advantage of estate planning in regards to asset protection is to prepare proactively long before these things ever come to pass — and hopefully many of them won’t.  First, let’s cover the two main types of asset protection:

Asset protection for yourself:

This is the kind that has to be done long in advance of any proceedings that might threaten your assets, such as bankruptcy, divorce, or judgement.  As there are many highly-detailed rules and regulations surrounding this type of asset protection, it’s important to lean on your estate planning attorney’s expertise.

Asset protection for your heirs:

This type of asset protection involves setting up discretionary lifetime trusts rather than outright inheritance, staggered distributions, mandatory income trusts, or other less protective forms of inheritance.  There are varying grades of protection offered by different strategies.  For example, a trust that has an independent distribution trustee who is the only person empowered to make discretionary distributions offers much better protection than a trust that allows for so-called ascertainable standards distributions.  Don’t worry about the complexity – we are here to help you best protect your heirs and their inheritance.

This complex area of estate planning is full of potential miscalculation, so it’s crucial to obtain qualified advice and not solely rely on common knowledge about what’s possible and what isn’t.  But as a general outline, let’s take a look at three critical junctures when asset protection can help, along with the estate planning strategies we can build together that can set you up for success.

Bankruptcy

It’s entirely possible that you’ll never need asset protection, but it’s much better to be ready for whatever life throws your way.  You’ve worked hard to get where you are in life, and just a little strategic planning will help you hold onto what you have so you can live well and eventually pass your estate’s assets on to future beneficiaries.  But experiencing an unexpected illness or even a large-scale economic recession could mean you wind up bankrupt.

Bankruptcy asset protection strategy: Asset protection trusts

Asset protection trusts hold on to more than just liquid cash.  You can fund this type of trust with real estate, investments, personal belongings, and more.  Due to the nature of trusts, the person controlling those assets will be a trustee of your choosing.  Now that the assets within the trust aren’t technically in your possession, they can stay out of creditors’ reach — so long as the trust is irrevocable, properly funded, and operated in accordance with all the asset protection law’s requirements.  In fact, asset protections trusts must be formed and funded well in advance of any potential bankruptcy and have numerous initial and ongoing requirements.  They are not for everyone, but can be a great fit for the right type of person.

Divorce

One of the last things you want to have happen to the nest egg you’ve saved is for your children to lose it in a divorce.  In order to make sure your beneficiaries get the parts of your estate that you want to pass onto them — regardless of how their marriage develops — is a discretionary trust.

Divorce asset protection strategy: Discretionary trusts

When you create a trust, the property it holds doesn’t officially belong to the beneficiary, making trusts a great way to protect your assets in a divorce.  Discretionary trusts allow for distribution to the beneficiary but do not mandate any distributions.  As a result, they can provide access to assets but reduce (or even eliminate) the risk that your child’s inheritance could be seized by a divorcing spouse.  There are a number of ways to designate your trustee and beneficiaries, who may be the same person, and, like with many legal issues, there are some other decisions that need to be made.  Discretionary trusts, rather than outright distributions, are one of the best ways you can provide robust asset protection for your children.

Family LLCs or partnerships are another way to keep your assets safe in divorce proceedings.  Although discretionary trusts are advisable for people across a wide spectrum of financial means, family LLCs or partnership are typically only a good fit for very well-off people.

Judgment

When an upset customer or employee sues a company, the business owner’s personal assets can be threatened by the lawsuit.  Even for non-business owners, injury from something as small as a stranger tripping on the sidewalk outside your house can end up draining the wealth you’ve worked so hard for.  Although insurance is often the first line of defense, it is often worth exploring other strategies to comprehensively protect against this risk.

Judgment asset protection strategy: Incorporation

Operating your small business as a limited liability company (commonly referred to as an LLC) can help protect your personal assets from business-related lawsuits.  As mentioned above, malpractice and other types of liability insurance can also protect you from damaging suits.  Risk management using insurance and business entities is a complex discipline, even for small businesses, so don’t only rely on what you’ve heard online or “common sense.”  You owe it to your family to work with a group of qualified professionals, such as us as your estate planning attorney and an insurance advisor, to develop a comprehensive asset protection strategy for your business.

These are just a few ways we can optimize your estate plan in order to keep your assets protected, but every plan should be tailored to an individual’s exact circumstances.  Give us a call or contact us today to discuss your estate plan’s asset protection strategies.

Discretionary Trusts – How to Protect Your Beneficiaries from Bad Decisions and Outside Influences

Leaving your hard-earned assets outright to your children, grandchildren or other beneficiaries after you die will make their inheritance easy prey for creditors, predators, and divorcing spouses.  Instead, consider using discretionary trusts for the benefit of each of your beneficiaries.

What is a Discretionary Trust?

A discretionary trust is a type of irrevocable trust that is set up to protect the assets funded into the trust for the benefit of the trust’s beneficiary.  This can mean protection from the beneficiary’s poor money-management skills, extravagant spending habits, personal or professional judgment creditors, or divorcing spouse.

Under the terms of a typical discretionary trust, the trustee is limited in how much can be distributed to the beneficiary and when the distributions can be made.  You can make the terms and time frames as limited or as broad as you want.  For example, you can provide that distributions of income can only be made for health care needs after the beneficiary reaches the age of 21, or you can provide that distributions of income and principal can be made for health care needs and educational expenses at any age.

An added bonus of incorporating discretionary trusts into your estate plan is that the trusts can be designed to minimize estate taxes as the trust assets pass down from your children to your grandchildren (this is referred to as “generation-skipping planning”).  In addition, you can dictate who will inherit what is left in each beneficiary’s trust when the beneficiary dies, which will allow you to keep the trust assets in the family.

While the distribution choices that can be included in a discretionary trust are virtually endless (within certain parameters established under bankruptcy and creditor protection laws), the bottom line is that a properly drafted discretionary trust will protect a beneficiary’s inheritance from creditors, predators, and divorcing spouses, avoid estate taxes when the beneficiary dies, and ultimately pass to the beneficiaries of your choice.

Where Should You Include Discretionary Trusts in Your Estate Plan?

Discretionary trusts should be included in all of the trusts you have created that will ultimately be distributed to your heirs, including:

  • Your Revocable Living Trust
  • Your Irrevocable Life Insurance Trust
  • Your Standalone Retirement Trust

What Should You Do?

If you are concerned that your children, grandchildren, or other beneficiaries will not have the skills required to manage and invest their inheritance or will lose their inheritance in a lawsuit or divorce, then talk to your estate planning attorney about how to incorporate discretionary trusts into your estate plan.