I Don’t Expect My Children to Have Problems with Creditors or Predators, So Shouldn’t I Just Leave My Property to Them Outright?Share this post
Even if an adult child is debt free and will never divorce, leaving their assets in a protective trust can still be beneficial. For one thing, life is uncertain, and you have no way of knowing what the future holds for your child. Your son, the doctor, may be sued for malpractice. Your daughter, the entrepreneur, may experience a business failure due to the turbulent economy. Your other daughter, the business executive, could be “downsized.” The bottom could fall out of the market, and wipe out the investments of all three of your children. And any of their marriage relationships, that now seem so strong, can be turned upside down through one lapse of judgment. Assets within the reach of creditors include any assets that the person had inherited as an “outright” distribution.
In addition, millions of Americans become severely disabled at some point during their lifetimes, sometimes as a result of accidents, and sometimes as a result of physical or mental illness. Federal and state governments have a myriad of entitlement programs available to support the disabled, but the majority of these programs are “means tested”— that is, you qualify for aid only if you don’t have too many assets or too much income.
If assets are passed to a child through an outright inheritance, the inherited assets would be counted in determining the child’s eligibility for governmental aid. That would typically disqualify the child from receiving that benefit, and would use up his inheritance instead.
However, those assets can be passed to the child in a spendthrift trust containing a “trigger” provision that converts the child’s trust to a “special needs” trust should the child become seriously disabled or otherwise eligible for governmental assistance. In that circumstance, the trust assets and its income should be excluded from the calculation in determining the child’s eligibility for assistance.
Are There Other Times a “Special Needs” Trust Would be Helpful Besides a Future Disability?
Yes. Special needs trusts are used for a wide variety of situations. The most common are for chronic physical or mental health issues. There is little sense in leaving an inheritance to a child or grandchild just to have it taken to reimburse an insurance company or government program.
A special needs trust is also valuable to protect a loved one who is trapped in a drug or alcohol addiction. The money can be managed by a trustee (other than the beneficiary) to provide for basic physical needs and rehabilitation expenses, while preventing its confiscation for reimbursement to government programs, and preventing its use for harmful substances.
But I Don’t Want to “Control From the Grave”!
There is a continuum that balances control and protection. You can give up all control over your assets at death, and pass them outright to your beneficiaries. That gives the beneficiaries complete control, and therefore provides no protections.
On the other end of the continuum, you can maintain complete control of your assets after death, provide no control to the beneficiaries, and provide fairly ironclad protections.
Most clients end up planning for something toward the middle of the continuum. They maintain limited control after death, and give the beneficiaries as much control as they can without sacrificing the protections from the beneficiaries’ creditors and “predators.”