When you want to leave an inheritance to your children after you are gone, you usually just leave outright distributions to them. However, when you leave outright distributions to your children, those bequests are fully available to your children’s lawsuits, bankruptcies and other creditors. In addition, if your children deposit their inheritance into a joint account with their spouse or co-mingle it with marital property, their inheritance may be considered marital property in the case of a divorce property settlement.
If your children are minors, what you leave them would have to be held in a conservatorship supervised by the probate court until the children reach age 18. At age 18, your children miraculously gain all the wisdom and insight of adulthood when the law says that they are adults and shall have their inheritance. Often times, when children receive a large sum of money at age 18, they end up going to the University of Corvette.
In order to avoid these outright distributions, you may want to set up a trust which has staggered distributions. A portion of the inheritance is distributed at certain ages, such as one-half each at age 25 and 30 or one-third each at 30, 35 and 40. Although these staggered distributions do protect your children from making inappropriate decisions during their youth, there is no protection for the distributions after they are made. Your children’s lawsuits, bankruptcies and other creditors and divorcing predator spouses may still have access to your children’s inheritance.
You may also want to consider lifetime trusts for your children. With lifetime trusts, the assets are placed in trust for your children for their lifetimes. For younger children, you would appoint a third party trustee who would manage your assets until such time that your children are able to handle their own financial affairs. After that time, each child is usually named a trustee of his or her separate trust with someone he or she chooses.
By setting up their inheritance this way, your children would have access to those funds at any time for any of their needs for health, education, maintenance and support. They could use those trust assets to buy a home, start a business or professional practice or take care of other needs. These lifetime trusts have two key protections. Firstly, any of the assets which you leave your children in these lifetime trusts are generally protected from your children’s lawsuits, bankruptcies and other creditors. The creditors do not have access to these funds, but the funds are available to your children for their needs. Secondly, so long as your children keep these assets in the trust and never commingle them with marital assets, what you left them will be protected from divorcing predator spouses. These trust assets are generally considered your children’s separate property and not part of a marital property settlement. By using these lifetime trusts for your children, you can have creditor and predator protection for the assets you leave your children.
In addition, you can put generation skipping transfer tax provisions in these lifetime trusts to get additional tax exemptions to allow these assets to be transferred down to your grandchildren without any estate tax assessments.
By: Matthew M. Wallace CPA, JD
Published edited October 5, 2008 in The Times Herald newspaper, Port Huron, Michigan as: How to leave an inheritance to a child