Safeguarding Your Child’s Inheritance

In your estate planning for the future inheritance of your children and grandchildren, it is essential to incorporate protective measures that prevent assets from being lost or claimed by creditors. A simple way to achieve inheritance protection is through a trust. A trust can pass your wealth to your family outside of probate. Specific trust provisions control asset distribution to ensure the money left to a beneficiary is not squandered through ill-advised spending, divorce, or other actions affecting the beneficiary.

Commingled Marital Assets and Blended Families

Divorce is a primary obstacle when trying to minimize issues with wealth transfer and preservation. High divorce rates, especially among aging Americans, can make an inherited trust vulnerable if the property becomes commingled with the marital estate. Single and married children, as well as grandchildren of inherited wealth, should always maintain inherited assets and property as a separate entity, whether as a trust or direct individual inheritance. Before any marriage or remarriage, sign a pre-nuptial agreement to protect previously inherited wealth and future legacies.

Lawsuits and Creditor Claims

Whether your child or grandchild inherits an existing trust or establishes a trust after a direct inheritance, the terms of the trust can limit the potential loss of inherited monies or assets due to lawsuits and creditor claims. A properly drafted trust can protect assets from legal action if your child is sued. A trust also protects family and beneficiaries from the public process of probate. Anyone can research probate court records and determine how much your estate was worth, what you owned, and how you chose to divide it.

Controlling the Inheritance

If you believe your adult child has limited financial skills to manage money properly and might squander your grandchildren’s inheritance, then draft a will or trust that explicitly earmarks a dollar amount or percentage of the estate for grandchildren. A will or trust can also specify inherited assets to be allocated for a specific life event or purpose, such as a grandchild’s college education or wedding.

Previously, the “stretch IRA” was another financial vehicle with some overspending controls. This inherited individual retirement account (IRA) has a required minimum distribution (RMD) that stretches over a more extended period based on the inheritor’s life expectancy. A monitored minimum distribution allows the principal to continue growing. However, due to the Secure Act, only spouses can be beneficiaries of a stretch IRA, not your children or grandchildren. Talk to a financial advisor or estate planning attorney for details and updates to existing IRA accounts.

Discuss Your Intent with Your Family

Whatever your intent is for your children or grandchildren, be sure to discuss it with them, expressing who will inherit and clearly stating the terms in your will or trust. Also, speak honestly about your fears that your child may blow through their inheritance and the value of limiting distributions to investment income or a percentage of the trust’s worth to preserve the assets. If your child has an addiction problem like gambling, drugs, or overspending, they may require trustee oversight to temporarily end distribution of trust funds until they demonstrate wellness. At that time, the trustee may opt to restart distributions.

Ultimately it’s best to find a trusted estate planning attorney familiar with the laws of your state to help you craft a comprehensive plan to protect your assets and ensure they’re distributed according to your intentions. Wills, trusts, powers of attorney, and more help you align your unique financial and personal goals for your legacy.

This article offers a summary of aspects of estate planning. It is not legal advice. It does not create an attorney-client relationship. For legal advice, we invite you to contact our offices in Midway, Erie, and Franklin PA.