When parents think about leaving an inheritance in trust for their children, they often assume trusts are primarily for young beneficiaries or adult children who may not be financially responsible. But even a successful, responsible adult child may benefit from having an inheritance remain in trust.
In fact, sometimes the more successful your children become, the more protection they may need.
Consider an adult child who is a physician, attorney, business owner, landlord or real estate investor. They may be financially sophisticated and perfectly capable of managing an inheritance. But their career and investments can also expose them to lawsuits, business liabilities, personal guarantees and other financial risks.
If you leave an inheritance outright, once it is distributed, it becomes part of your child’s personal financial life. How those assets are titled, invested or combined with other property can affect the protections available to them.
What about divorce?
California is a community property state, but an inheritance received by one spouse is generally considered that spouse’s separate property. However, issues can arise when inherited assets are commingled with community property or used in ways that make tracing the separate property more difficult.
For example, your daughter might inherit $900,000 and use some of it to improve a home she owns with her spouse, place some in a joint account and invest another portion in a family business. These may be perfectly reasonable decisions, but over time the inheritance can become intertwined with other assets.
Keeping an inheritance in a properly designed trust can create a clearer boundary between inherited family wealth and your child’s personal financial affairs. This does not mean you expect your child’s marriage to fail. The goal is simply to preserve options and protections before they are needed.
Leaving an inheritance in trust does not necessarily mean your adult child must ask someone else for permission every time they need money.
A thoughtfully designed trust can provide considerable flexibility. Depending on your goals and the trust provisions, your child may have access to funds for housing, health care, education, family needs, investments and business opportunities. Your child may also participate in managing the trust while an independent trustee or co-trustee handles certain decisions when additional protection is important.
The details matter. No trust provides automatic or absolute protection from creditors or divorce. The protection available depends on California law, how the trust is drafted, the beneficiary’s level of control and how it is administered.
Instead of asking, “Is my child responsible enough to receive the inheritance outright?” consider asking: “What could happen to the inheritance after my child receives it?”
Think about your child’s career, marriage, business interests, real estate, potential creditors, children and long-term financial circumstances.
Your estate plan is not simply about deciding who receives your assets. It is also about deciding how those assets reach the people you love and what protections can accompany them.
If your trust currently provides for an outright distribution to your adult children, it may be time for a review. As your children’s lives change, your estate plan should evolve with them.
Send your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues.This article is provided by your local estate planning attorney, Corina Colan. The Law Office of Corina I. Colan / (909) 265-3315 / www.colanlegal.com
0 Comments