How Safe is Your Children’s Inheritance?

Maybe you want to provide for yearly family vacations. Or perhaps you’d like to help with the cost of college education for your grandchildren. Whatever the reason, we instinctively seek to ensure that the next generation has it just a little bit better than we did. But how safe is your children’s inheritance? The answer is: not as safe as you think.

A variety of factors could mean that what’s here today is gone tomorrow. However, the two main dangers to the legacy you pass down are creditors and predators. Creditors come in different forms. It could be credit card debt or medical bills. There is also a less obvious type of creditor: the holder of a lawsuit judgment. Imagine this: you work hard to build a nest egg for your family. You put in place a will, trust and other estate planning documents. You enjoy a long, healthy retirement. It seems as though you’ve done everything right, and on the surface, you have. Now imagine this: the day after you pass away, your son or daughter is involved in an auto accident. Then the other driver brings a lawsuit against that child, which the other driver wins. That money you left behind? The court could order that it be paid to the driver with whom your child was involved in the auto accident. Scary thought, right?

The other primary threat to your legacy are predators. Think Bernie Madoff or the business partner who defrauds your loved one. More worrisome are divorcing spouses. Here is the common scenario: Party A receives an inheritance and deposits the money into a joint account with his or her spouse, Party B. The inheritance has now become marital property. Thereafter, Party A and Party B divorce. In divorce proceedings, marital property is usually split 50/50. That means Party B is likely to be awarded a portion of the inheritance. Surely the parents of Party A did not intend to benefit their now former son-in-law or daughter-in-law. Yet, that’s the result.

Fortunately, you can structure your estate plan so as to alleviate many of these concerns. It’s called continuing trusts, something we will discuss in detail next time.