Reader Question: My husband and I have a combined estate of about $2 million and one child. We are concerned with the guy she is dating and would like some advice on how to keep him from getting any of her inheritance upon our death since she is our only heir. Any advice would be appreciated. A.M.
Answer: First, congratulations on building a sizable estate. Many parents worry about leaving too much money to their children for any number of reasons. They worry that the money will create a disincentive for the children to work hard and strive for their own success. They worry that the children lack the experience for investing large sums of money. They worry that the children will spend the parent’s hard-earned money unwisely. And they certainly worry that a spouse or ‘significant other’ will end up with the money through a divorce or deceit. I would add to the list that if you assume your child will become extremely successful financially, that a significant portion of your money ends up going to the government for estate taxes. I also worry about a judgment in a lawsuit since America remains one of the most litigious societies in the world. With all of these concerns, what can a parent do to protect children from themselves and others?
Having worked with families and their finances for over thirty years, I’ve seen each of these ‘concerns’ play out in real life. The solution we developed is called a Legacy Trust. It contains a number of key elements:
- Typically, it’s a trust you set up under your will and it doesn’t become ‘operational’ until the last of you (parents) dies.
- Typically, your money remains in trust for the lifetime of your child. However, you can provide for distributions of principal at predetermined ages if you wish.
- It has provisions that provide appropriate monthly cash flow (income) during your child’s lifetime that rises over time to offset inflation.
- Provisions are also included that provide for access to principal under certain circumstances such as for healthcare needs, education, down payment for purchasing a home or other situations that you think would be important.
- There are specific provisions that insulate the money from a divorcing spouse.
- There are specific provisions that insulate the money from a judgment in a lawsuit.
- You can include a provision that protects the money from potential estate taxes (within limits).
- You can even set the trust up so that it is available for multiple generations of heirs providing funding for education and other needs.
If you think about it, a child who receives a large inheritance only has two choices: spent it or invest it. If she chooses to spend it, there are only two choices: spend it wisely or spend it inappropriately (from your perspective). If she chooses to invest it, she only has two results: invest it well or invest it poorly. Given these choices, the use of a trust with a professional trustee significantly improves the chances that money will be spent appropriately and invested well. Understand that you have tremendous flexibility in how you design this trust. I like to say, “If you can dream it up, we can figure out how to include it in a trust.”
If you’d like a White Paper with more details on the Legacy Trust, email me at Stewart@WelchGroup.com; write ‘Legacy Trust’ in the subject line, and I’ll email you a free copy.