Spendthrift Trust

Using Trusts to Maintain Control of Inheritances

Trusts, like estate plans, are not just for the wealthy. They are used to provide control in how assets of any size are passed to another person. Leaving an inheritance to a beneficiary in a trust, according to the article from Times Herald-Record titled “Leaving inheritances to trusts puts you in control,” can protect the inheritance and the asset from being mishandled.

For many parents, the inheritance equation is simple. They leave their estate to their children “per stirpes,” which in Latin translates to “by roots.” In other words, the assets are left to children according to the roots of the family tree. The assets go to the children, but if they predecease you, the assets go to their children. The assets remain in the family. If the child dies after the parent, they leave the inheritance to their spouse.

Some beneficiaries need more protection than others.

An alternative is to create inheritance trusts for children. They may spend the money as they wish, but any remaining assets goes to their children (your grandchildren) and not to the surviving spouse of your child. The grandchildren won’t gain access to the money, until you so provide. However, someone older, a trustee, may spend the money on them for their health, education and general welfare. The inheritance trust also protects the assets from any divorces, lawsuits or creditors.

This is also a good way for parents, who are concerned about the impact of their wealth on their children, to maintain some degree of control. One strategy is a graduated payment plan. A certain amount of money is given to the child at certain ages, often 20% when they reach 35, half of the remainder at age 40 and the balance at age 45. Until distributions are made to the heirs, a trustee may use the money for the person’s benefit at the trustee’s discretion.

The main concern is that money not be wasted by spendthrift heirs. In that situation, a spendthrift trust restricts payments to or for the beneficiary and may only be used at the trustee’s discretion. A lavish lifestyle won’t be funded by the trust.

If money is being left to a disabled individual who receives government benefits, like Medicaid or Supplemental Security Income (SSI), you may need a Special Needs Trust. The trustee can pay for services or items for the beneficiary directly, without affecting government benefits. The beneficiary may not receive any money directly.

If an older person is a beneficiary, you also have the option to leave them an “income only trust.” They have no right to receive any of the trust’s principal. If the beneficiary requires nursing home care and must apply for Medicaid, the principal is protected from nursing home costs.

An estate planning attorney will be able to review your family’s situation and determine which type of trust would be best for your family.

Reference: Times Herald-Record (Feb. 16, 2019) “Leaving inheritances to trusts puts you in control”

Financial and Estate Planning for Second Marriages

Thoughtful planning will help a second marriage avoid certain issues that didn’t exist the first time around.

Thoughtful planning will help a second marriage avoid certain issues that didn’t exist the first time around. Most lives are more complex, with children and assets from first marriages.

MP900430627A second marriage is more likely to succeed, if the couple addresses key questions in advance, especially those concerning finances. You’ll want to have a clear vision of your current financial needs and what you expect the future to bring, according to a recent article in Investopedia, “Second Marriage Financial Matters to Consider.”

Let’s look at some topics of concern:

Assets and Liabilities.Do a complete review of both of your assets and liabilities. Assets include bank accounts, stocks, bonds, house, cars, retirement plans, insurance contracts and other investments. Liabilities are things like your credit cards, student loan debt, car loans, and mortgages. In addition, note that there are rules in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) where asset ownership is treated differently: in these states, the law presumes that assets will be owned jointly.

Daily Financial Management.You should next think about how’ll manage your financial obligations on a regular basis. Some couples combine their checking accounts, and some keep separate checking accounts.  However, you should create a new joint account, into which both parties make a monthly contribution. Joint expenses are paid from the new account, and other personal expenses are paid with individual accounts.

Beneficiary Designations.Your retirement plans—like your IRA and 401(k)—have named beneficiaries. These should be checked regularly.  The same thing should be done with your insurance policies and annuities. This is the perfect time to review who is currently designated, because any agreements from your first marriage may potentially inhibit your ability to update your beneficiaries. They should also be reviewed.

Update Your Estate Plan.A will states your final wishes and details how certain property will be distributed to your heirs. It also designates guardians for minor children and your executor, the person you nominate to make sure your wishes get carried out. It is an excellent time to review your will, to see if you should execute a new one or modify the existing one. Blended family dynamics can also have an impact when reviewing your estate plan. If either spouse has children from a previous relationship, adjustments to your plan may be necessary.

Trusts and Trustees.Ask your estate planning attorney about trusts, like a bypass trust, a qualified terminable interest property (QTIP) trust, or a spendthrift trust. One of these or another kind of trust may be a useful way to transfer wealth to children, while imposing some restrictions. Dividing your assets between a surviving second spouse, the children from that marriage, and any children from a prior marriage may result in some tension. One way to avoid this is to give an independent trustee the ability to make adjustments, so everyone is treated fairly and according to your instructions.

Taking the time to clarify these matters before you walk down the aisle, will allow you both to focus on the relationship and starting a new life together.

Reference: Investopedia (May 29, 2018) “Second Marriage Financial Matters to Consider”