Perhaps you have heard that one of the best things about creating a trust is that it helps your estate avoid probate, saving your survivors a lot of money, time and headaches. This is absolutely true.
Yet there are other advantages. One that is often overlooked and which will be the focus of this article is the ability to ensure your children or other beneficiaries do not waste their inheritance.
The best way to explain how we can do this is by example:
John and Judy are in their early 60’s, married, retired and have two college age sons, Jimmy and Jack. Jimmy has always been the life of the party and despite six years of college, has never graduated. He works as a bartender and struggles to pay rent for an apartment. Jack is a little bit older, is married and has two young children. Jack is married to Joan, who is a great mother and a terrific person but is also a spendthrift. Jack makes a good salary, but due to Joan’s spending habits, lives paycheck to paycheck.
John and Judy love their sons and want to split their estate fifty / fifty. However, they are concerned that if Jimmy inherited half of their estate, he would not use the money productively and would probably waste it within a year. As for Jack, they are more concerned about Joan’s spending habits. While the inheritance wouldn’t be legally Joan’s, it would be practically Joan’s since Jack would use the money to support his family and, unfortunately, Joan’s reckless buying.
John and Judy have assets of approximately $750,000. They both have pensions, social security and investment income and live well within their means. They also have long term care insurance to protect their estate from the expense of assisted living and nursing homes. As of now, they have not touched their nest egg and it’s probable that they will leave a sizeable inheritance to their sons.
John and Judy are ideal candidates for a trust. First, they have significant assets. The more assets a person has, the more important it becomes to avoid probate. Second, they have a control issue. That is, they do not want to leave an outright inheritance to their sons due to their concerns about the money being wasted.
The trust for John and Judy works this way: It is a joint revocable trust and they are both co-trustees. Once the first spouse passes away, the second spouse is the sole trustee and has control of all the assets to do as he or she pleases. It’s when the second spouse passes that the control issue for the sons is addressed. John and Judy can go one of two ways. They can either leave half to each son with the condition that each son has to reach a certain age to get a percentage of the money or they can create spendthrift trusts which provide an annual income to each son but also provides that the health, education, maintenance and support of each child is paid for out of that child’s share in the absolute discretion of the trustee. The trustee can either be other relatives, a corporate trustee such as a trust company or a family friend.
The first option is a common choice for many of my clients. One common scheme is to give a child 1/3 of his inheritance when they turn 25, 1/3 when they turn 30 and the final 1/3 when they turn 35. Meanwhile the remaining balance is invested and can grow until the child reaches those ages. Income from growth can either be re-invested and added to principle or distributed to the beneficiary monthly, quarterly or annually.
The second option requires a strong trustee. Under this scenario a beneficiary can request bills be paid and those bills can be paid directly by the trustee or not, depending on the situation. Example: Beneficiary wants to buy a car which has a monthly payment of $400 per month. The trustee cannot pay this but agree to pay a payment which is $300 per month. Either way, the beneficiary is forced to live reasonably. You need a strong trustee who will not bend to persuasive tactics by the beneficiary.
As an additional benefit, holding the funds provides a terrific form of asset protection from creditors of the beneficiaries. As long as the beneficiary has no direct access to the funds and cannot require a distribution, creditors cannot access the funds either.
There are many other benefits to these types of control mechanisms and trusts which are too broad for the scope of this article. Contact our office at (636) 887-5297 for more information or to schedule a free consultation.