Leaving Assets Can Be Tricky

Maybe you grew up without much. You worked hard. You earned a good education. You succeeded in life even though the streets weren’t paved with gold where you grew up. Maybe you even grew up in a very impoverished, oppressed community.

Now you (and your spouse if you’re married) have accumulated enough so you’re comfortable. Maybe you’re not a billionaire, but you feel like you’ve achieved a reasonable level of material success. After your death, you’d like to provide for your loved ones so they can be a step up the ladder of financial stability and so they can get a good education and get a good start in life.

Deciding to whom you want to leave your assets is often the easy part. Often the difficult decision is determining the best way to leave them your assets. Let’s say you want to leave your assets to your children at your death. What’s the best way to do it?

You could leave your assets to them outright. That might be the right solution sometimes, but all too often, that’s not the right solution. This is the first in a series of blogs that will examine different ways to leave assets to a beneficiary and when and why that might be appropriate.

The first way is very similar to giving the assets to them outright after your death. It would be to give them the assets in a trust set up after your death from which they could demand the assets at any time they want. This type of trust is often called a “Divorce Protection” Trust or an “Access” Trust. From an income tax standpoint, this trust is treated the same as the beneficiary. In other words, no separate tax ID number is needed for that trust. It can use the beneficiary’s social security number for reporting.

If they can withdraw the assets whenever they want, then what’s the benefit of the trust? The assets will retain their character as the beneficiary’s separate property and won’t get comingled with their marital assets. Of course, since the beneficiary could withdraw the assets at any time, the asset would be subject to the beneficiary’s creditors. This type of trust wouldn’t be a good choice for a beneficiary who had creditor issues or who was irresponsible.

But it might be a good choice for a beneficiary who was responsible and whom you just wanted to keep the assets separate in case they get divorced down the road (even if they’re not now married).

While the trust would keep the assets separate, in some states the court could consider these separate assets in making an asset allocation between spouses upon divorce or in awarding child support or alimony.

In the next blog in the series, we’ll look at the best way to leave assets for a beneficiary who is or may be incarcerated.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com