Valar Morguhlis[i] “All Men Must Die”
It’s true – each of us is mortal. Our mortality raises many questions. For some of us those concerns include questions about how to keep the assets that we worked hard to build from wasting away and how to continue to protect our children from outsiders and themselves. Often those concerns are interrelated.
Questions arise, such as:
Will my children use my money to enjoy a lavish lifestyle without ever even trying to make a difference in the world (the classic “trust fund” child)?;
Will an associate or “friend” of my child take advantage of her financially?;
What if my child joins a cult or is the target of a lawsuit?; and
What happens if my spouse gets remarried to some gold digger?
The concern about remarriage (which conjures up images of the evil stepmother) can be the most vexing. Fortunately, a well drafted trust agreement can answer any and all of the above questions. A trust can protect the children from themselves and from a stepparent.
The first level of protection is to use a revocable living trust or a testamentary trust to pass assets to the children[ii] rather than leaving the estate to the children outright. A primary advantage of using a properly drafted trust is that the assets are protected from the child’s creditors as long as they remain in the trust.
There are circumstances where it makes sense for the children to have the right to withdraw without limitations. In many instances, however, it is more prudent to stage the right of withdrawal. Usually those stages are triggered by reaching a designated age. The hope is that as the child gets older he will become more mature and better able to make sound financial decisions. Sometimes enhanced withdrawal rights are used as incentives for things such as graduating from college or getting married. The staged withdrawal rights are the second level of protection.
The third level of protection is to withhold withdrawal rights from the child and instead to give the trustee discretion to make distributions of principal to the child when the trustee determines that such distributions are in the child’s best interests. Such an arrangement may lead to a disgruntled child but it is as close as we can get to a workable solution for the parent concerned with protecting the child’s inheritance from himself.
What about protection from the potential stepparent, who, whether evil or not, may have a different agenda from the first spouse to die? When a married couple is engaging in planning it is fairly painless to add protections for the children that will take effect after the surviving spouse passes away. But what about protecting the children’s interest in the estate from the surviving spouse (in blended families) and/or the new husband or wife of the surviving spouse (which can be a concern both in first marriage and blended situations)?
The natural inclination of spouses seems to be to leave everything to each other on the death of the first. Unfortunately, allowing the surviving spouse to access and control the entire combined estate does nothing to protect the children.
What does protect the children is to leave the surviving spouse’s interest in a trust that pays income to the spouse but does not allow the spouse to withdraw principal. Such a trust is sometimes referred to as a QTIP trust.[iii] The trustee will have the power to invade principal as necessary for the spouse’s health, maintenance and support. With an independent trustee, “best interests” can be added to that list. A best interests standard gives the trustee broad discretion concerning when to make a principal distribution. There are, of course, other permissible marital trust variations go beyond the scope of this article. We would be happy to discuss those variations with you in person.
So, while it is true that “all men must die” with proper planning we can continue to protect our financial legacy and our children even after we have “shuffled off this mortal coil.”[iv]