Estate planning often focuses on two goals: protecting your estate and providing for your heirs. People often tell me that they want to keep their estate plan simple. They want to leave an inheritance outright and without complication for their children or their grandchildren. Most often people do not realize this method of estate planning can expose their children’s inheritance and leave them with nothing to help them in later years! First if their descendant has creditor problems (such as a default on a credit card, unpaid medical bills, or a divorcing spouse), the creditors can satisfy their claim against the child by attaching the gift. Additionally, younger children or grandchildren are also prone to spending an outright inheritance on present desires and fail to save for future needs or their own retirement.
The most commonly used tool for protecting an inheritance (and thus the estate) is a trust. The use of a trust often allows clients to both provide for their heirs and protect the estate they’ve spent their entire lives accumulating. With a trust, one person (the trustee) holds property for the benefit of another (the beneficiary). Trusts are highly flexible and can be drafted to suit almost every need. For example, when a trust is properly drafted and contains the correct language (called a “spendthrift trust”), the trustee has the ability to deny a beneficiary’s creditors access to the trust fund. When the Settlor (the trust creator) fears a child or grandchild will frivolously spend an inheritance, the trust can be drafted to only distribute for certain types of expenses or at certain times. Thus, where a client is worried about a child’s spending habits and wants the child to “mature” with their money management skills, a trust can be drafted to distribute one-third of the principal to that child at age 25, one half of the balance at age 30, and the remainder at age 35. This way, the child can learn the hard lesson about wasteful spending at a young age and still have enough of his or her inheritance left to be able to save for the future. Alternatively, if a grandparent wants an inheritance to be used for a grandchild’s education (but also available for food and shelter if needed), the trustee can be restricted to only make distributions for the grandchild’s education, maintenance, or support.
For any parent or grandparent of a special needs child, the use of trusts can be critical. If a special needs child receives an outright inheritance, he or she can be required to spend the entire amount on his or her medical care, leaving nothing for the future. With a supplemental needs trust, a parent or grandparent can leave an inheritance that can provide for quality of life expenses such as vacations or new clothes and other expenditures not covered by state benefits.
Properly drafted, a supplemental needs trust will not disqualify that special needs child from state benefits, will be protected from attachment by the state, and can pass the remainder of the trust on to other beneficiaries at the death of the special needs child without any payback to the state for benefits received.
If you want to provide for your heirs and protect your estate, you should take an active role in planning your estate. Trusts are powerful tools in ensuring your wishes in your estate plan are carried out. Because trusts are so flexible, proper care should be taken to include the proper provisions and exclude language that would undermine your intent. When done correctly, you will be amazed at what you can do for your heirs. To get advice on planning your estate, please contact Peter Harrison at (860) 567-8718 or by email.