Estate Planning Mistake #3 – Leaving Property Outright to Your Children
This continues my series of discussions about “The Most Common Estate Planning Mistakes.” Please refer to my previous blog entries for other common estate planning mistakes
In my last blog entry, I discussed the potential risks of leaving everything to your spouse in your will. This entry addresses some of the risks of leaving everything to your children.
We love our children, and most of us want our children to inherit what we have worked so hard to accumulate during our lifetimes. So why not simply make a provision leaving your assets to your children upon your demise? In many cases, this is a perfectly fine (and easy) solution.
But what if one of your children is too immature to handle the responsibility of inheriting a large sum of money on his or her own? What if they lack the financial sophistication necessary to appropriate use the money for their lifetime needs and future retirement, rather than buying a fancy sports car, investing in far-fetched business schemes, and partying until the money is all gone? I know of very few 18 year-olds who would know what to do with an inheritance of a few hundred thousand dollars.
What if the child marries a fortune-hunter, or is addicted to drugs or alcohol? What happens if the child gets involved in a lawsuit, gets divorced, or remarries? Would your hard-earned assets wind up in the pockets of someone other than your child?
I’ve learned that “life happens.” That is, there are so many unexpected life circumstances that can occur in one’s life. Consider using your estate plan as a means to help protect your children and other heirs from their own poor decisions and life circumstances that may be out of their control.
One possible solution is to use a revocable living trust to protect them. As an example, I recently drafted a trust for an individual who had two minor children. It provided that upon my client’s death, the children would get income from the trust until they reached 40 years of age! The Trustee could disburse money from the principal of the trust for the kids’ health, education, and general welfare (we wouldn’t want the kids being thrown out of their apartment for inability to pay their rent). They could also invade principal for buying a reasonably priced used car and towards a down payment on a reasonably priced house. At 30, they would get 1/3 of the principal; at 35, they would get one-half of the remaining principal, and at 40, they would get the balance.
Upon my client’s death, the trust helps to avoid the expense, time, and hassle of probate.
Also, upon my client’s death, the trust becomes irrevocable. The provisions are now etched in concrete, and must be carried out according to my client’s wishes. This is why a trust is sometimes referred to as “controlling your assets from the grave!”
The trustee is able to continue administering the assets of the trusts for the benefit of the kids while they are under 18 years of age, and thereby avoid the necessity of having a guardian appointed for the kids’ assets via a court proceeding.
If the kids make a bad financial decision, sign a bad contract, or such, the spendthrift provision of the trust prevents a creditor from accessing the money through a garnishment or other legal proceeding.
By disbursing the money at a later age, the delay in access to a large some of money will give the children the time to learn about money management and investment to (hopefully) make better use of the money when they receive it.
And by disbursing the money in installments, if they ultimately make a mistake with the first disbursement, they still have time to hopefully learn from their mistakes and hereby help avoid losing all of the money at once.
It is important to remember that, while you are still alive, you always have the ability to amend, or even revoke, your trust. So as your children grow-up, if they show financial maturity in their life dealings, you always have the ability to change the provisions of the trust to allow for an earlier disbursement of the principal after you die.
But in the meanwhile, you’ve taken a major step at protecting your children from predators, as well as their own mistakes and bad decisions.
I will discuss additional common estate planning mistakes, and several methods of avoiding probate in future blogs.
Previous blogs regarding estate planning mistakes:
Mistake Number 1 – Dying Intestate.
Mistake Number 2 – Having an “I Love You, Honey” Will off
Jerrold E. Slutzky, J.D., CFP® is a Florida-licensed attorney at law with offices in Safety Harbor, Florida and Land O’ Lakes, Florida, serving Pasco, Pinellas, and Hillsborough Counties. His practice focuses primarily on Estate Planning Services (wills, trusts, powers of attorney, health care directives, living wills, asset protection, etc.), Probate, and Business Law Services to small business owners (buy/sell agreements, start-ups, choice & formation of business entity, business succession planning, drafting/negotiating/review of documents, confidentiality agreements, corporations, LLCs, partnerships, etc.) and General Legal Counsel & Advice.
Jerry has two office locations:
853 Main Street, Suite A, Safety Harbor, Florida 34695 (Pinellas County) and
20719 Sterlington Drive, Suite 103, Land O’ Lakes, FL 34638 (Pasco County).
You can call him at (813) 909-1515, or email him at JSlutzky@SlutzkyLawFirm.com.
His website is www.SlutzkyLawFirm.com.