14 Jun 7 REASONS TO NOT GIVE OUTRIGHT ASSETS TO YOUR CHILD
It is common for parents with simple wills or trusts to have their children inherit and have outright ownership of parents’ assets after the parents’ death.
However the following seven (7) reasons are advantages for the child to inherit by trust (not including, the power often given to the child to manage and invest the assets as a trustee as they would had they owned the property in their individual capacity):
- Creditor Protection. If the beneficiary inherits and receives the property which is to be held in trust with a spendthrift provision, the assets held in the trust would be protected from the child’s creditors – even if child declared bankruptcy.
- Divorce Protection. Even though an inheritance is separate property, all property that is part of the marital estate (i.e., of a child going through a divorce) is presumed to be community property. Furthermore, there is risk of comingling and good records must be kept to overcome the presumption that the property is community property. A trust (as long as the assets are held in the trust) would clearly be separate property.
- Protection From Son-in-Law or Daughter-in-Law Either Remarrying or Making Bad Decisions. Even though your son-in-law or daughter-in-law is wonderful, it is possible that if your child dies before his or her spouse and your child gives all their assets (including those inherited from you) to their spouse (your son-in-law or daughter-in-law). The surviving son-in-law or daughter-in-law could get remarried and leave the inherited assets from you going to their new spouse or his or her family. The son-in-law or daughter-in-law might also have a duty to support their new spouse (using their inherited funds) if the new spouse has health issues. Also, the son-in-law or daughter-in-law could make bad decisions regarding the inherited assets that could otherwise pass to your grandchildren or other intended beneficiaries.
- Guardianship Avoidance. If your child should lose mental capacity, the trustee could control the inherited assets and there would be no need for guardianship over the inherited assets.
- Loss of Potential Public Benefits. Since people are living longer, the odds of disability during life are increasing. Care costs and drug costs are continuing to rise, and properly drafted contingent trusts could prevent the loss or eligibility for valuable public benefits such as Medicaid.
- Bypass Child’s Estate for Tax Purposes. If your child has a large estate, the inherited assets in the trust would not be included in the child’s estate for estate tax purposes.
- Protection of Child if They Are a Spendthrift. If the child is not good at handling assets, handling money, or is likely to spend it as soon as they inherit it, a trust can protect the child from their own potentially ill-advised actions.
Of course, if a child is underaged or a minor there should always be a trust. So, perhaps it is not best to give your assets directly to your children.
If interested in attending our next free ($1,000 value as attendees also get a free meeting) Estate Planning Essentials Workshop on June 16, click here or call (214) 720-0102.