BY: CORT H. BETHMANN, JD, LLM
Wealth Advisor, Argent Trust | (615) 591-4002
When I partner with clients and their attorney to set up their estate plans, one question that comes up frequently is the best strategy for passing their wealth to their children after their death.
The answer to that question can be different in each family situation. Some of our clients choose to give their money as an inheritance. Others structure their trusts so that when their children reach a certain age, the trust starts paying out portions of the principal, and the remainder is provided after the parent passes away.
Many of our clients aren’t aware that there’s a better option available — lifetime trusts. These are trusts that, as the name indicates, last through the lifetime of their beneficiaries.
Despite a host of reasons why a lifetime trust might be in your beneficiaries’ best interest — a few of which I’ll go through in a moment — clients hearing about them for the first time often wrestle with the idea. There’s a general perception that giving assets to your children in trust conveys the underlying message that they aren’t trustworthy. Because of that, many clients prefer to give their money outright as long as their children are old enough to handle the responsibility.
But leaving money in a lifetime trust has nothing to do with trustworthiness. A well-maintained trust can support a family for decades to come, ultimately giving your beneficiaries all the control they could want, while providing them some important protections as well.
One key benefit of a lifetime trust is that it can ensure that a family’s money stays protected in case of a divorce. When a mother and father set up their trust, they intend for their money to go to their son or daughter, then on down the biological tree.
However, consider the possibility that after you give your assets outright to a son or daughter, they are divorced from their spouse. All those assets could be brought into the marital estate and divided between your child and their ex-spouse. You may love your daughter-in-law or son-in-law, but you probably also want your children to keep the wealth that you’re passing down to them.
Other scenarios could be that a son or daughter gets in an accident or hurts somebody, gets into debt or has a business deal that goes bad. In those cases, assets handed down from their parents would be subject to creditors — unless they’re kept in trust. These situations are the kinds of things you think will never happen, until they do.
One major issue surrounding trusts is who ultimately has control over the money. Clients often want their children to be the designated trustee — and in many jurisdictions, including Tennessee, where I’m located, the laws do allow for a trust’s beneficiary to serve in that role. Although the money is held in trust and the trustee has to abide by certain rules to access it, they can make distributions from the trust for their own health, education, maintenance and support needs.
I suggest to my clients that, if they choose to go this route, they first sit down with their children and communicate the reasons why they want to leave their money in trust. The key is communication — explaining to the children that this arrangement isn’t a negative reflection on them, and legally protects them from unexpected future life events that may threaten to take away their inheritance.
If you decide to put your money in a lifetime trust, one important thing to know is that once in place, it’s irrevocable — meaning that it can’t ever be altered. So it’s very important to have a good team of legal and financial advisors involved in creating the trust to make sure that everybody is on the same page.
In many client situations, the benefits of a lifetime trust far exceed the drawbacks, providing your family financial protection and control for many decades to come. If you’re considering a lifetime trust for your family, I’m glad to answer any questions or discuss them with you further. Give me a call at (615) 591-4002.