Sunday, 14 April 2024

Estate planning: Protecting your beneficiaries

Is protecting the inheritance you will leave to your family against their creditors, subsequent divorces, misuse and abuse important to you? If so, then certain types of trusts provide possible solutions.


However, giving your estate outright to your beneficiaries (i.e., into their name) offers no such protection.


Before you die, you have the opportunity to protect your estate for the benefit of your loved ones. Why pass up that opportunity? Let’s look at each of these concerns and consider possible solutions.


It is possible to protect inheritances against your beneficiary’s own creditors. Your assets do not answer for your heirs own debts (except if they are also your debts) unless and until your loved ones inherit the assets directly.


Accordingly, you can protect the assets that you leave to your heir by transferring your estate to a so-called “discretionary, spend-thrift trust” that is managed for his benefit.


The managing trustee would have absolute discretion either to use the assets for your heir’s benefit or to distribute directly to him without ever being required (except in limited cases) to pay the beneficiary’s creditors.


Of course, in that case the trustee could not be the heir himself because the creditor protection would be lost. The desired outcome depends entirely on your estate being left to such a trust. Otherwise, once assets are received by your beneficiaries these assets are subject to creditor action.


Another issue is whether your estate might become involved in a beneficiary’s subsequent divorce. If your beneficiary is married and inherits assets from you, then provided that such assets are kept solely in the name of your beneficiary, any subsequent divorce will not implicate a division of that asset.


But, if your beneficiary retitles what he/she receives from you, or commingles the inherited money, then a later divorce may result in half going to their ex-spouse.


Keeping the inheritance in a trust or buying an annuity (in their name) will help protect against the inheritance becoming co-owned by the beneficiary’s spouse.


Even if creditors and divorce are not an issue, some beneficiaries cannot manage money for one reason or another.


If you leave money to a person who is a “spendthrift,” more than likely their inheritance will be consumed by bad spending compulsions.


A so-called “support trust” – where the trustee is directed or authorized to make trust distributions either to your beneficiary or for his/her benefit (i.e., to help pay for necessities) – will prevent the beneficiary from wasting the money by allowing the money to be invested, and used wisely for his benefit.


Another concern is a beneficiary who has an alcohol, drug, gambling or other addiction.


The inheritance if received directly may simply fuel the problem. A “substance abuse” trust provision that requires the beneficiary to be tested and not be allowed to receive any funds until he/she tests ‘clean’ is needed in that case. The trustee can even pay directly for a rehabilitation program with trust funds.


In summary, with proper estate planning, you can do much to preserve assets left to surviving loved ones.


Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 1st St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235.

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