Dear Len & Rosie,
My parents are fairly wealthy – they are worth over five million dollars. Is there any way I can put a barrier between me and my inheritance? I tend to be irresponsible with money. I played the lottery a lot and I used to make high risk investments. Some investments have paid off but more have lost money. If I suddenly came into a million dollars, I don’t know what would happen. I don’t really trust myself. How do I tell my parents something like this without outright saying I am a bad person?
The first step towards solving any problem is recognizing you have a problem. You are certainly not a “bad” person because you lack prudent investment skills. There are several approaches you can take to preserve your inheritance once you get it.
Given that you’re a lousy investor, get help. Don’t listen to the little voice in your head that says to hold onto an investment that isn’t doing well. Making investment decisions based on hunches alone isn’t investing. It’s gambling. Instead, hire a financial advisor with a good track record and rely on that person’s advice. Consider having two separate financial advisors, so you can see how well they do against one another.
You should also talk to your parents. Instead of leaving you an inheritance outright, they could create a dynasty trust for your benefit. The idea behind a dynasty trust is that there are three fundamental problems with inheriting wealth. You can get sued and lose your inheritance. You can get divorced and see your spouse drive into the sunset in a Lexus your parents paid for. And, if you’re lucky (or have a skilled financial advisor) you could do very well with your investments, so well in fact that your children will have to pay federal estate tax on your death.
A dynasty trust is, at its heart, a “spendthrift” trust that is not subject to the claims of the beneficiary’s creditors (except for child support creditors and the IRS). It’s also a convenient means of protecting your separate property inheritance in the event of a divorce. And your inheritance, and all of its appreciation, will be exempt, for the most part, from federal estate tax on your death.
With a dynasty trust, your parents can create a framework to manage your inheritance. The trust could require you to hire a financial advisor. If you are extremely bad with money, they could go so far as to make someone else your trustee, perhaps a brother or sister. Or maybe you and another person can be co-trustees, and you could be restricted from spending over a certain amount without your co-trustee’s agreement. Your parents can also write restrictions in the trust as to how assets are to be invested. They can allow you to leave the trust upon your death to anyone you want, or they can require you to leave it to family members only.
It’s important to remember that proper estate planning isn’t done by filling in the blanks on a one-size-fits-all boilerplate document. It’s about analyzing an estate and developing a multi-generational estate plan that will help your parents and their children achieve their goals.
Len & Rosie
Dear Len & Rosie,
I have been married for 25 years to a man who has two grown sons by a previous marriage. I have one grown daughter of my own. My husband had several properties when I married him, which will go to his sons. I had enough money to pay for half of our home and half of a small business.
My husband made up a trust naming his sons as beneficiaries of all his property, except for our household furniture. Since I am a joint owner of the house and the business property, he felt I would have enough to take care of myself.
Recently, I had my own revocable trust done at a trust seminar. I transferred my half of our home and our business into my trust. Now, when we receive any correspondence concerning our business, it is addressed to me as a trustee. If I am only a trustee, would that make my husband the sole owner? I don’t want to be left with nothing. The people from the seminar have left town and I don’t want to discuss this with my husband.
Once again, a trust mill strikes. These guys rolled into town, put on a fancy seminar, sold you a trust without telling you how it works, and rolled out of town, never to be heard from again. This is the kind of service you get from a trust mill that mechanically goes through the motions instead of providing authentic legal advice.
A free seminar is fine if you want some basic information about trusts. But if you decide you want a trust, you ought to sit down with a local estate planning attorney. As a consumer, you should not deal with law firms that do not return your telephone calls and answer your questions.
There are two problems with your trust. First, you do not quite understand it. There are three parties to a trust; the settlor, the trustee, and the beneficiary. You are the settlor, the person who made the trust. You are also the trustee, the person in charge of the trust. After you die, the successor trustee you named in the trust will take over. You are also the beneficiary of the trust for as long as you live.
It is alright if you get account statements mailed to you as trustee. That just means your trust is properly funded, and this is a good thing. Because you are the settlor, and also the beneficiary, your assets are still your own. You can do anything with them that you want. Your husband owns only his half of the home and the business, not your half.
The second problem, and the big one, is that if your husband dies first, you may not wind up with the home and the business property. If the two of you owned the home and the business as joint tenants, and you signed documents to put your half into the trust, then you have severed the joint tenancies.
What this means is that you and your husband own the home and business as tenants in common. If you husband dies first, his half of the home and the business will not automatically go to you. Rather, it will likely pass into his trust and then to his children via his pour over will, if his half is not already in his trust.
To fix this, your husband’s trust ought to say that you are to receive his half of the home and the business if he dies first. That means you will have to bring this up with him. If you do not deal with this problem now, you will have a much larger problem to deal with after your husband’s death.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-1 p.m. and Sundays, 4-7 p.m. on KGO Radio 810 AM.