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
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]
[i] George R. R. Martin: A Song of Fire and Ice ("Game of Thrones")
[ii] A revocable living trust is established during the lifetime of the person making the trust. The terms of a testamentary trust are contained in a will. The trust does not come into existence until the person passes away.
[iii] QTIP stands for qualified terminable interest property. A QTIP trust qualifies for the unlimited marital deduction for estate tax purposes.
[iv] Wm. Shakespeare: Hamlet