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"Insurance" for your Beneficiaries' Inheritance

If you break it down, a lawsuit is filed every 2 seconds and the divorce rate has been as high as 50% within the last 10 years. People typically plan to leave everything they own outright to their spouse, children or other people when they pass away. Given these realities, though, you may want to strongly consider doing otherwise, because once inherited outright those assets are then exposed to any claims that may ever be made against your beneficiaries. There is a way to better prevent this from happening …

The traditional method of leaving assets to most beneficiaries has been this:

  • If a beneficiary is a minor or even a young adult, clients would plan to leave their assets in Trust to be used for the beneficiary’s needs until certain ages, at which point the beneficiary would receive those assets outright (e.g. the beneficiary would receive one-half outright at age 25 and the balance outright at age 30).

  • If the beneficiary was already an adult and financially mature enough, clients would plan to just leave their assets outright to the beneficiary.

The concern with this approach is that regardless of whether the beneficiary receives their inheritance outright or has to wait a number of years before receiving it outright, once the assets are in the beneficiary’s name, those assets are then unprotected as to potential creditors!

We know one day we all will die and many of us will leave behind quite a bit of money when that happens. That money either comes from a lifetime of accumulating wealth or a person receives life insurance proceeds because of our death, or maybe both. Death gives us the opportunity to leave our assets to our spouse, children, grandchildren or other people in a manner in which those assets are protected for them in a way we are unable to do for ourselves. What I mean by this is that if I create a Trust for the benefit of myself (i.e. I am both the creator and beneficiary), there is no protection for any assets held by that Trust if I get divorced, sued or declare bankruptcy. However, if I leave my assets in a Trust at my death for the benefit of someone else, those assets are heavily protected if that person then encounters the problems mentioned above. Please note this is not what is commonly referred to as a “Living Trust.” That kind of Trust offers no asset protection but is more for probate avoidance.

With that said then, whether you start out with a Will or “Living” Trust, instead of structuring that document to leave your assets outright at your death, the superior manner of transferring wealth is to leave your assets in Trust for the beneficiary. Not only should assets pass to a Trust, those assets, for many, should stay in Trust for the rest of the beneficiary’s life. If the beneficiary is mature enough, the beneficiary can serve as the Trustee of their own Trust and it will still be significantly asset protected under South Carolina law! If the beneficiary is a minor or lacks maturity, the Trust can be designed so that at a certain age, the beneficiary can become the Trustee of their own Trust. Other options are available regarding how much control to give the beneficiary – it may be best that the beneficiary never be the Trustee.

This is something that I routinely bring up with clients, although not with everyone. The point I try to get across is that it doesn’t matter how old or financially mature the beneficiary is – I want them to understand that if assets are left outright to their beneficiaries rather than in Trust, those assets are more likely to be taken from them. After discussing this, a client may just not be concerned with the downsides in leaving assets outright or they may not be willing to pay to do otherwise. But, many people really see a lot of value in planning this way. No matter what the client ultimately decides, at the very least, though, I want them to be aware of what can be done.

Structuring your plan this way is a bit like an insurance policy for your beneficiary’s inheritance that kicks in when you die.

And I practice what I preach – I want my parents to leave my inheritance in Trust for me and so have designed their plan that way – when they pass my share of their assets goes into a Trust in which I am the beneficiary and also the Trustee. It is designed in such a way that I have a tremendous amount of authority over what can be done with the assets to the extent that for all practical purposes, it is almost as though they are leaving the property to me outright. But, if I ever encounter a problem like the ones mentioned above, those assets are significantly protected from those creditors.

If it were your choice, would you rather inherit property outright or in Trust?

Contact Hamrick Law in Greenville, SC for estate planning and business planning!

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