We all cherish our children, yet we may have reservations about their choice of spouse. And no, Jake, I am not pointing a finger at you!
Our responsibilities in estate planning extend beyond merely allocating assets to loved ones. We also need to discuss safeguarding the legacies your clients painstakingly built, ensuring they stay within the family. Safeguarding these assets is especially crucial when there is uncertainty or discomfort regarding the person their child married.
One critical aspect that I believe many financial advisors overlook or inadequately address is protecting their client’s child’s inheritance from divorce. It is not a pleasant subject, but it is a reality your client may need to confront. Inheritance Trusts should be a discussion point with your client as the design of these trusts primarily protects those cherished family assets from that rogue son or daughter-in-law.
Misconceptions About Inheritance Trusts
Many people may believe that Inheritance Trusts are only for the ultra-wealthy. However, this type of trust protecting an inheritance from a child's divorce can be a valuable tool for families and estates of various sizes as it provides asset protection in a divorce for your client's children.
Inheritance Trusts for Children and Grandchildren
Inheritance Trusts are not just legal documents but valuable tools for the ultimate disposition of assets to your client's family. This trust for their children enables your clients to set precise terms for handling their assets, including safeguards against unforeseen circumstances like divorce. By guiding your clients in creating these trusts, you help them protect their children's or grandchildren's inheritance.
Protecting Inheritance from Divorce
We know that divorce can lead to a split of assets, sometimes right down the middle. You need to discuss estate planning and divorce together when planning. Without this, your client's children's inherited wealth may end up with an unintended recipient, like a manipulative son or daughter-in-law. Your recommendation of an Inheritance Trust can be the key to keeping those assets within your client's family.
Revocable and Irrevocable Trusts?
If your client only has a Revocable Living Trust, it may offer flexibility but fall short of providing strong protection against divorce claims. An Irrevocable Trust could work, but it is a more rigid option, and may provide robust protection as it cannot be easily altered or revoked. When viewed against these two options, an Inheritance Trust could be a strong option.
Structuring an Inherited Trust
An Inherited Trust, also called a "beneficiary trust," ensures that assets remain protected once they pass from your client to their children. As a financial advisor, understanding how an inherited trust is structured, especially in conjunction with a client's revocable trust, is valuable.
Creation of the Revocable Living Trust
The creation of a revocable trust for the children is the initial step. Your client establishes a revocable living trust, placing assets within the trust's control. This trust often provides your client control of the assets and the flexibility to alter terms during their lifetime.
Creation of the Inheritance Trust
Your client's attorney will draft the Inheritance Trust to include specific terms and conditions that your client would like, such as asset protection from potential divorce or creditors of the beneficiaries.
Incorporation of the Inheritance Trust
Within the revocable trust's documents, specific provisions name the Inheritance Trust as the recipient of assets upon your client's death. When your client passes away, the assets within the revocable trust flow into the Inheritance Trust.
Potential Challenges and Legal Considerations of an Inheritance Trust
While offering significant advantages, inheritance trusts have challenges that need careful consideration. One of the potential drawbacks is the cost factor. Establishing and maintaining an inheritance trust involves expenses such as drafting the initial documents. Should a corporate trustee be chosen, an annual trustee fee will also apply, adding to the total cost.
Another consideration is that Inheritance Trusts are subject to rules that may vary across states and jurisdictions. Engaging legal professionals with expertise in trust law specific to your region is important.
Inheritance trusts represent a sophisticated and versatile tool in your arsenal of financial planning. From safeguarding assets against unforeseen circumstances like divorce to ensuring a family's legacy remains intact for future generations, these trusts may provide a worthwhile solution.
By working closely with experienced legal professionals, your clients can create Inheritance Trusts that protect their hard-earned assets, helping them preserve and protect what matters most.
(1) Keeping Your Assets in the Family — The Inheritance Trust, by Ettinger Law Firm, n/d, https://www.trustlaw.com/keeping-your-assets-in-the-family-the-inheritance-trust.html#:~:text=The Inheritance Trust is created,of the Mary Jones Trust”
(2) An Inheritance Trust Can Keep Your Assets In Your Family
by The Karp Law Firm, n/d, https://karplaw.com/an-inheritance-trust-can-keep-your-assets-in-your-family/
(3) What You Should Know About Inheritance Protection Trusts by Bouman Law Firm, n/d, https://www.tomboumanlaw.com/inheritance-protection-trust.html
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