Please explain to me why most people work so hard to accumulate wealth and spend so little time protecting it for their family? It makes no sense.
I mean think about it. By the time you leave this world either you’ll be broke or you’ll leave assets – one or the other.
If you die broke, you don’t have to worry about your beneficiaries at least.
But if you die owning assets, why not take a few minutes (and in many cases, that’s all it takes) to make sure the people you love get what’s left?
Now, it’s true that you don’t know how much you’ll have left when you kick the bucket. So what?
If you plan now and die broke, nobody gets hurt.
If you die with assets and don’t plan, everyone (except the lawyers) lose.
Look. Even if you don’t have children or grandchildren, you want to protect your beneficiaries. You’ve worked too hard for your money to ignore this issue and let somebody else decide what happens to your treasure once you are gone.
I’ll tell you how to do that, but first, let me share a couple of stories with you.
I recently read an article about a grandfather (we’ll call him Bill) who left a large sum of money to his grandchildren but named his son Jerry as the trustee of the trust.
He also named Jerry the beneficiary because Bill figured as long as he told Jerry to spend the money for the kids’ education, he’d do it.
Sorry. Unfortunately, Jerry (the father of the grandchildren) thought it would be a good idea to spend that money on a vacation home rather than save it for the kids’ education.
It goes without saying that Jerry is a jerk. But Bill may have been an even bigger bozo than his son. Before I explain why, I need to give you some background.
How To Protect Your Family
If you want to leave a specific amount of money to a specific person for a specific purpose, one option is to set up a trust (for after tax money).
Within that trust, you name your beneficiary and the gift you want to pass along to them. Simple. Another option is to set up a will. We will discuss this option in future posts.
If you were in Bill’s situation, you could name the grandchildren as beneficiaries of the trust since they are the people who you want to benefit eventually. You also need to select a trustee — someone who will manage the assets as the trust spells out.
It’s pretty important to name a trustee you trust. Bill didn’t have to name Jerry as trustee.
Had Bill set up a the trust and thought about it a bit (using a lawyer or a self help legal service like Legal Zoom) Jerry never could have blown the bucks on a vacation home.
Bill knew that his son was irresponsible. Why did he name him as trustee?
Even if Jerry had been a good, trustworthy son, Bill’s trust should have spelled out exactly what the trustee could and could not do with that money. Then, if Jerry did something counter to his responsibilities, he’d be liable for it in a court of law.
So Bill had two chances to safeguard his grandchildren and he blew it. Am I being too harsh?
I do know that the world is full of “Jerrys” out there and you can’t do much about that. But you can do a lot to make sure those clowns don’t have a chance to play with your money — or ruin your family’s financial future.
So, talk to an attorney who specializes in estate tax. Think about who you want to leave assets to and who you want to protect those assets against.
A good attorney will draw up a plan that can probably take care of that. That will include language in the trust of course but it will also include how other assets are held and the beneficiary documentation on life insurance, annuities and retirement accounts.
Actually, when it comes to life insurance, annuities and retirement accounts you have to be extra alert. That’s because these investments all have beneficiaries and the money will go to those beneficiaries no matter what your trust or will says.
Make sure you go over each investment (including retirement assets) with your estate tax professional and get 100% clear on what you need to do in order to safeguard your family.
Once your attorney provides guidance, it’s super easy to make any required changes. Simply contact the institution, get a new beneficiary form, update it, keep a copy – and send in the original.
It’s really easy to blame someone else for being irresponsible. But it’s much more effective to look at myself and make sure I’ve done everything I can to fulfill my responsibilities — regardless of what others have done.
What say you? Have you set up a will or trust? Have you reviewed your beneficiary documents lately?
chuck wintner says
April 14, 2009 at 2:23 PMWould like to know more about trusts and tenants in common. How can I will my children my assets, without also willing them my liabilities? I understand that a trust would subject them to my liabilities. Is that so?
c
Neal says
April 15, 2009 at 7:35 AMChuck,
I appreciate your concerns. Since I’m not an estate planning attorney, I’d suggest you’d talk to your attorney. I think getting the wrong advice on this one could be very expensive.
lori says
April 14, 2009 at 6:07 AMI have found this to be very interesting. What about 529 plans for the schooling? Can’t these be set up while the grandparent is still alive and have inheritance transferred to it upon death?
Neal says
April 14, 2009 at 6:28 AMYes. Great question. I’ll likely write about this in the future. The 529 can be a great tool to help control the money and reduce estate tax. Also, the grandparents – or any trustee – can name successor trustees so the plan can continue even after the trustee dies.
Great question.
Aaron says
April 14, 2009 at 5:47 AMI’ve had many experiences like this. Usually they involve second marriages later in life. For example, Ellie & Chuck were neighbors for many years.
Ellie’s husband passed leaving her quite wealthy. Her money was placed in a trust for her benefit and then to her children.
Chuck’s wife passed several years later.
They connected and married after her demise. Chuck & Ellie sold their homes and purchased a new place as joint tenants.
Then they decided to revise their trust documents. In this case, the trusts allowed to support the other spouse but had no restrictions on what “support” was.
Unfortunately, Chuck got cancer very soon after doing the trust and passed quickly. They were married for entire nine months.
Ellie survived him for over 15 years. Over the years, she _never_ too a dime out of her trust for her support for anything she wanted to do for her children. She cut off communication with Chuck’s family.
When she passed, she had consumed almost all of Chuck’s assets he earned before they were married, effectively leaving his heirs with nothing as in inheritance while leaving a couple million for her daughter and granddaughter.
Something about that just rubs me wrong.
Another case involves Janet who’s first husband of 40 years and father of their three kids passed. She remarried shortly after to Jack. Janet’s kids were somewhat sharp and realized they needed to protect their mom’s assets if they were to have any hope of an inheritance. They established an irrevocable trust that allowed Janet and Jack access to the income from the trust. Janet passed soon after creating this document.
Jack became the trustee but knew he could only have the income from the trust. So Jack would purchase bonds with high interest rates and large premiums. For example, he would buy a bond with $10,000 face value for $12,000 because it had a higher interest rate. That higher interest would be paid as income which he would extract from the trust effectively extracting an extra $2,000 from the trust that he wouldn’t have been allowed to take out otherwise.
Over the course of several years, Jack managed to decimate the principal of the trust leaving almost nothing for Janet’s children.
I wish I could say this is the only case I’ve seen, but it happens over and over.