Last week, a friend from my golf club told me that he and his wife are set to inherit significant assets when his parents pass away. However, because he is in a profession that is prone to lawsuits, he was curious if there was anything he should think about before this inheritance occurs.
I’m not athletic enough to golf well and explain estate planning concepts at the same time, so I told him I’d email him a detailed answer after our round. And, I thought it would be a good topic for this week’s blog. Here’s the email I sent to him:
Dear Joe,
It was great playing with you last week and catching up.
As a follow up to our brief conversation on hole 11, I would like to offer to review your parents’ estate planning documents, with their estate attorney, to ensure that they include what’s called a spendthrift provision.
A spendthrift provision is a specific clause embedded within a trust document that restricts a beneficiary's ability to transfer, pledge, or spend their future inheritance before they receive it. At the same time, it prevents most creditors from reaching into the trust to satisfy the beneficiary's debts. (Some exceptions apply. In many states, claims for child support, alimony, or federal taxes can still reach the trust, and the protection ends once money is paid out to the beneficiary.)
The clause does two things:
No Voluntary Transfer: The beneficiary cannot sell their interest in the trust or use their future inheritance as collateral for a loan.
No Involuntary Transfer: Creditors cannot force the trustee to pay them directly, nor can they attach a lien to assets sitting safely inside the trust.
What makes your situation with your parents particularly interesting is that they can do some asset protection planning for you now, while they are still alive, that is much more difficult to do later, after you’ve inherited the assets.
I’m specifically referring to the fact that your parents can leave assets in trust for your entire lifetime, and your kids’ lifetime as well, only granting you access to those assets under specific conditions. And that limited access helps protect those assets from lawsuits and keeps them separate from marital property if you divorce.
And if the trust is designed to last into your kids’ generation, their estate attorney can include provisions that continue to protect these assets for your kids as well.
This is fairly easy for them to do now, but much harder for you to wall yourself off from those same assets after you’ve inherited them, because most states don’t protect trusts you set up for yourself (there is a way, it’s called a domestic asset protection trust – DAPT and it’s beyond the scope of this email).
You may be wondering: wouldn’t I be better off just having the money in my name vs. having it inside a trust that I don’t have full control over?
Maybe. It depends on how important it is to you that some of your assets be protected. But given your line of work and the threat of lawsuits involved in what you do, I’d think it would be pretty important. Also keep in mind that your parents’ trust only controls assets titled in trust. Retirement accounts, life insurance and other accounts with beneficiary designations pass outside the trust unless the trust is named as the beneficiary. That’s worth reviewing too, because inherited IRAs generally aren’t protected from creditors in bankruptcy.
I’d suggest based on what you’ve shared with me about the size and makeup of their estate, we can work with their estate attorney to arrange things so that you will be in a position to have your cake and eat it too – so that one-third of what you inherit will pass outright to you, free of restriction, and the balance will remain in a protected trust where a trustee can distribute income and principal to you for your needs.
But in order to do this we need to act now, while your parents are alive. Your parents’ assets will pass to you based on the terms of their revocable living trust (RLT). Most RLTs that I review distribute 100% of the assets outright to heirs once they’ve reached a certain age. This is the opposite of protecting those assets and instead, leaves them vulnerable to things like lawsuits and divorce. It’s also why a spendthrift clause alone isn’t enough: it only protects assets that stay in the trust, so it has to be paired with a trust that continues for your lifetime.
Let’s set up a meeting for the 5 of us sometime in the next couple of weeks.
Whether you are in your 70s or 80s and worried about your own estate plan, or you are in your 50s and 60s and thinking about your parents, you should have confidence that your family’s estate planning documents offer you this kind of protection.
If you or someone you love is seeking this kind of advice around wealth and complexity, please send me an email at rob@swrpteam.com
Our specialty is helping successful families navigate wealth and all the complexity that comes with it. We want to continue to write about the topics that are most important and interesting to readers like you – so if you have questions or blog article ideas, please reach out to us and let us know - rob@swrpteam.com
