After working hard and saving for a lifetime, you will want to leave an inheritance to your loved ones without having to worry about some third party taking that money.
Unfortunately, many people see a sizable inheritance as a reason to try to take what they can get from your heirs. Receiving the bounty of your hard work may make your children vulnerable to financial predators.
There are things that you can do while still alive to protect your heirs from gold-diggers and opportunists. A California estate planning attorney can explain how to protect an inheritance from divorce, creditors, and lawsuits.
Responsible Adults Doing the Right Things
We often hear about people wanting to set up a spendthrift trust to protect a child who does not manage money well or a similar arrangement for a loved one with special needs, mental health challenges, or addiction issues. One does not often think about protecting adult children who work hard and handle their finances responsibly. But even responsible adults may face circumstances that jeopardize their inheritance.
If your child receives assets directly from your estate, they could lose much of that money one day through no fault of their own. Here are a few examples of common scenarios in which this may happen:
- Your child could marry someone who sees the inheritance as a financial opportunity. People have been marrying for money as long as there has been a concept of money. For example, if your child uses inherited funds to buy jointly-titled assets like a marital home, your child may unintentionally gift half of that inheritance money to their spouse. The spouse could file for divorce and walk away with half or even more.
- Your child could be cheated by a business partner. If your child starts a business with inherited funds, a business partner could siphon off money from the company and even disappear with the embezzled funds. Your child may be left with massive debts and no way to pay them. Your child may file for bankruptcy, but the bankruptcy trustee may then take the remaining inheritance money and use it to pay the business debts.
- California has unusual laws about liability. Let’s say that someone else causes a multi-car accident, hitting your child and several other vehicles. If the at-fault driver does not have enough insurance coverage or money to pay for the severe injuries from the collision, your child could end up getting sued along with the negligent driver. It is possible for a judge to assess one percent of the fault to your child and order your child to pay the unpaid damages out of inherited funds even though your child did not cause the crash.
Every single one of these scenarios could possibly be prevented by an effective estate plan.
Spendthrift and Inheritance Protection Trusts and IRA Legacy Trusts
If you set up your living trust to include language that creates a Spendthrift Trust, also known as an Inheritance Protection Trust, gold diggers and opportunists may be unable to get their hands on your child’s inheritance. In a nutshell, these special trusts work by letting your child control and use the inherited assets but not own them. Some or all of the funds may remain in the trust until the child reaches a certain age, or even for the child’s entire life. The trust may also provide that shares of the trust may be distributed to the child when he or she reaches certain ages. So long as the assets remain in the trust, no one can take away from your children what they do not own. Your child would get all of the benefits of the inheritance without the risk of loss to others. If you already have a living trust without these terms, you could execute an amendment or restatement to add inheritance protection trust provisions to your living trust.
If you have a retirement account that needs protection in a similar manner, you may execute an IRA Legacy Trust. Retirement accounts no longer have the protection from creditors that they used to enjoy, but an IRA Legacy Trust can fix that issue, just as a spendthrift or inheritance protection trust may protect non-IRA assets.
Living trusts should not be DIY projects. If you make a mistake on these sophisticated legal documents, your child could lose all of the protections you intend to create. A California estate planning attorney can draft the documents you need to protect an inheritance from divorce, creditors, and lawsuits. Contact our office today for a free consultation.