ESTATE PLANNING
ESSENTIALS
The Right Way and the Wrong
Way of Leaving Money to Your
Children (And Others)
Introduction
• There are professions that help you make money. The job of an
estate planning attorney is to help you leave your money (and other
assets) to your children, grandchildren and other heirs.
• There are two sides of estate planning: The “money” side and the
“family” side.
• The money side focuses on leaving more of your wealth to your
family with less going to the IRS. Very boring stuff. I’m falling
asleep in mid-sentence just thinking about this.
• The “family” side focuses on leaving your children an inheritance in
a manner that does not leave a legacy of chaos and conflict. Now it
gets exciting -- because we are talking about the family killing each
other over the inheritance!
Introduction (cont.)
• The 95% Rule – 95% of the solution to any
family inheritance problem is recognizing the
problem in the first place.
• There is no class on “Family Inheritance
Problem Recognition” in law school. The only
school that teaches this is the School of Hard
Knocks -- from seeing the kind of problems that
arise after the parents have die and and their
children divide the inheritance.
What You DON’T Want from Your
Inheritance Plan
• 1. An Inheritance Plan that cause harm to the family
relationships.
• 2. An Inheritance Plan that does not protect the “family
money” for your child…and from your child’s problems.
• 3. An Inheritance Plan that allows your surviving spouse
to lose ownership and control of the “family money”.
• 4. An Inheritance Plan that your children may decline to
carry out.
• 5. An Inheritance Plan that puts your children and
property through the probate court process.
Should You Tell Your Children
About Your Inheritance Plan?
• Of course! Next slide, please!
• But first, a bit of exposition. You should tell your
children about your inheritance plans because:
1. Your children are already thinking about
their inheritance.
2. Your children may think they are getting
more than you think they deserve.
3. Your children need to know about the role
they will play after you are gone.
Goal No. 1:
Don’t Allow Your Inheritance Plan
to Do Harm to Your Family
• No. 1 Rule: Treat your children fairly in
your Inheritance Plan.
• No. 2 Rule: You will have screwed up
your family forever if you violate Rule No.
1.
How To Accidentally
Use Your Inheritance Plan to
Screw Up Your Family
• You die with a child owing you money.
• You fail to equalize lifetime gifts to your
children.
• You leave only one of your children as
“The Boss” of the Inheritance Plan.
• You leave one property to one child and
another property to another child.
• You make one child the “money manager”
for another child’s inheritance share.
How to Intentionally
Use Your Inheritance Plan to
Screw Up Your Family
• Punish your successful child’s success,
and reward your dingbat child’s failure.
Goal No. 2
Don’t Let Your Inheritance
Plan Give Your Children A Shot to
Blow the Dough
• Two very obvious statements that you’ve never thought
about before:
•
When you die, you no longer own your money and
property.
•
When you die, your children own what used to be
your money and property.
• So what? So now the money and property you acquired
after a lifetime of effort is now subject to the winds of
your childrens’ fates.
•
What Kinds of Fates?
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Addiction
Financial immaturity
Divorce
Remarriage
Disability
Income tax problems
Bankruptcy
Creditors
Lawsuits
Professional malpractice actions
Crazy Cults
Mandatory tithing to religious entity
Accidents with insufficient (or no) insurance
Medical bills
Protecting Your Child’s Inheritance
with (drum roll…)
A PROTECTION TRUST!
• The PT is not a separate plan outside your
Inheritance Plan. It is a part of your
Inheritance Plan.
• The PT builds a “castle wall” around your
child’s inheritance.
• The PT protects your child’s inheritance
from risks of loss.
• The PT can be guaranteed protection…or
no protection whatsover!
Four (Count ‘em…four!) Types of
Protection Trusts
• The Revocable Protection Trust – sometimes
called the “Transparent Trust” because it’s like
having no protection at all.
• The Self-Directed Irrevocable Protection Trust
• The Third-Party Irrevocable Protection Trust
• The Discretionary Protection Trust
“Transparent Trust”
• It’s like a Living Trust for your child’s inherited
assets.
• Your child is the owner, manager and
beneficiary of all assets.
• Your child has complete freedom over the
assets in the TT.
• So what good is it? It’s still pretty good because:
•
a. Helps maintain separate property status of
inheritance.
•
b. Prevents your child from spending money
on a separate property inheritance trust.
Self-Directed Irrevocable Protection
Trust
• Your child can only use the inheritance for the
purposes set forth by you in your Living Trust.
• You give your child as much…or as
little…freedom with the assets as you want.
• Your child is the manager and beneficiary of the
inherited assets.
• Who is looking over your child’s shoulder to
make sure the inheritance is being used
properly?
• When your child dies, the inheritance goes to the
“back-up beneficiaries”…like your grandchildren.
Third Party Irrevocable Protection
Trust
• Someone else other than your child is in charge
of your child’s inheritance.
• Why tie your child’s hands with his/her own
inheritance? Because you are abjectly
concerned your child will blow the dough.
• Who is the third-party to be the manager of your
child’s inheritance? If you can help it, never let
your “normal” child be the inheritance manager
for your “trust child”.
• Shall this IPT last for the rest of your child’s life?
The Discretionary Protection Trust
• The “Neutron Bomb” of Estate Planning.
• You appoint a third-party to manage your
child’s inheritance…who has the
COMPLETE AUTHORITY to decide to pay
out to your child…OR NOT PAY OUT
ANYTHING to your child.
• Why use this Trust? One
word…CREDITORS!
Goal No. 3
Making Sure Your Inheritance Plan
Will Be Carried Out
• You will appoint, most likely, your children to carry out your
inheritance instructions.
• Will your children do it your way…or their way?
• You can have the greatest Inheritance Plan in the world. But if its
not carried out the way you want after you die, it might as well be a
cocktail napkin. Examples of deviation:
•
“My money is family money…so your money is family money.”
•
“That’s Dad’s wish…that’s not my wish.”
•
“Too many grandchildren.”
• Legal obligation to carry the instructions out your way? Of course!
But…so what? You’re dead! What can you do about it?
• Preventing your children from deviating from your inheritance
instructions
Goal No. 4
Protecting Your Surviving Spouse
• Protecting the assets FOR your SS…and
FROM your SS.
• FOR your SS = Protecting your SS’s
ownership and control of the family
money.
• FROM your SS = Preventing your SS from
leaving your children’s inheritance to a
“newfound friend”.
Protecting Your SS’s Control of the
Family Money
• Protect from who?
• The “Last Caretaker”
• Your Children who are grasping for an “early
inheritance”.
• Ways that your children can convince your SS to
part with the family money now…instead of
having to wait for your SS to die.
• Solution: Special provisions in your Living Trust!
Protecting the Family Money From
Your SS
• You can leave it to your SS, but will your SS
leave it to your children?
• Red Flag Alert! Remarriage means that the new
spouse may end up with it all!
• How can you be certain that your SS will not
deviate the family money from the bloodline?
• Solution: Bypass your Spouse
• Solution: The Marital Trust
•
Sub-Goal: Preventing Conflict
Between Your Second Spouse
and the Children from Your First
Marriage
• If you hate your second spouse, leave him/her in a
situation where your “First Children” have to wait for your
“Second Spouse” to die before inheriting the family
money.
• Several conflicts:
•
1. Income vs. Growth
•
2. “You’re Spending Our Money.”
•
3. “We Don’t Want to Wait.”
•
4. “Get Out of Our House.”
Solution: The Colin Powell/John Wayne approach to
estate planning: Terminate the economic connection!
How Much Inheritance…Is Too
Much Inheritance?
• Do you have a child whose main job is waiting for you to
die?
• Are your children spending their inheritance – and you’re
not dead yet?
• Have you spoiled your child with all his/her worldly
needs, and your permissiveness has lead to an inability
(or unwillingness) to lead a conventional lifestyle?
• Does your child march to the beat of a different drummer
who believes work is something that you do – but that’s
just not for him/her?
• Do you love your child, but you just don’t love what
he/she does and you don’t want the inheritance to
maintain that lifestyle?
Solution:
The Incentive Inheritance Plan
• Two types of Incentive Plans
1. The Conditional Incentive Plan.
2. The Unconditional Incentive Plan.
Conditional Incentive Plan
• The plan that is the stuff of movies.
• Your child meets a certain condition and a
third party “money manager” gives him all
or portions of his/her inheritance
• Why you love this plan – because you
control your child’s behavior and conduct
from “Beyond the Grave”.
• Why I don’t love this plan – It’s the “carrot
and stick” plan that will not work.
The Unconditional Inheritance Plan
• A true incentive plan.
• This is a plan that says to your child, “This
is all you are going to get. If you want
more, then you need to find a way to get
more, such as getting and keeping a
steady job!”
Conclusion
• In the Inheritance Arena, the family side is just
as important as the money side.
• In the Inheritance Arena, you don’t know what
you don’t know. The only way to learn about the
inheritance problems and conflicts that arise is
by someone bringing them to your attention.
Some smart guy like me!
• After you have been made aware of these
problems, you can put the appropriate plan in
place to prevent them from arising in the first
place.