Advance planning is key to keeping it in your family

When your child or children inherit from you will they lose it if they get sued or when they get divorced? Will the inheritance you leave to them be taxed in their estate when they pass? Will they squander it? Will it disincentivize them to be productive, contributing member of society? Will the inheritance cause them to lose precious government benefits?

Let’s assume, hypothetically, Max and Florence are happily married retirees who moved here from Ohio two years ago. They have two children whose names are Joe and Emily. Joe is a successful surgeon. He is married to Madeline. They have two children whose names are Emily and Sue. Emily is an elementary school teacher who is married to Jack. He is a struggling artist. They have one child whose name is Franklin. Franklin is autistic.

Max and Florence have a simple will. An Ohio lawyer prepared it for them twenty years ago. It is “simple” because it basically says everything goes free of trust to their spouse if their beloved spouse survives them, and of not, it goes to the children free of trust in equal shares. Now, is this going to be good enough to fully protect them and their family? You decide.

If Joe and Emily inherit free of trust, then if they get sued or divorced, they can lose their inheritance. Since they will own the inheritance free of trust, there is nothing to protect the inherited funds from loss in a lawsuit, bankruptcy, or a divorce. If Joe gets sued for medical malpractice, he could lose all his inheritance. If Joe does not get sued but successfully accumulates wealth, then what he inherits could be exposed to the federal estate tax when he passes. If Emily passes or predeceases, and her share goes to Franklin, this windfall could jeopardize Franklin’s ability to qualify for government benefits. All these things can and often do happen to families who fail to act, who fail to plan ahead to neutralize these threats.

If Joe and Emily each inherit their share pursuant to the terms of a trust for their benefit, then if it is drawn properly, the monies or assets can be available for their use and benefit during their life, but not subject to loss in divorce, not subject to loss in lawsuits, not subject to estate taxes in their estate (exceptions: if they owe the IRS money or they owe child support). Also, Max and Florence can ensure that the assets will stay in their family bloodline. Effectively, they can direct that when Joe and Emily pass, that their share (or what is left of it) goes to their children. They can provide that if this happens the share for Franklin will be held in a special needs trust which will preserve Franklin’s ability to qualify for government benefits. If they think Emily will waste the money by careless spending, they can have Joe serve as trustee, alone or with another, to administer the monies for the benefit of Emily.

When planning your estate, all these matters require attention. Professional guidance and counsel are imperative to success in this area. The moral of the story is that a little bit of planning can do wonders to keep your assets in your family.

Mark F. Winn, J.D., Master of Laws (LL.M.) in estate planning, is a local asset protection, estate and elder law planning attorney. mwinnesq.com