The statistics on Americans' successfully passing wealth to future generations is grim. Around 70 percent of families' wealth does not reach the second generation. The percentage of millennials with student loan debt is at 45 percent and rising. Between 40 and 50 percent of marriages end in divorce. Both student loan debt and divorces offer legal avenues for the government and other creditors to seize assets. So, even though you created a Will to pass on your hard-earned money to your children and grandchildren, that may not be enough. Conversely, certain types of trusts may offer the type of asset protection you need.
When Can the Government Seize Income?
Unfortunately, there are at least a few ways the government can take money you left for your heirs and beneficiaries. Inheritances can be intercepted to pay unpaid child support, alimony, or back taxes. Judgments against your beneficiaries could also make inheritances vulnerable. If your daughter becomes a physician, for instance, she is at an elevated risk for being the subject of a lawsuit. Without a smart estate planning strategy, the wealth you leave her could end up in the hands of the plaintiff.
Another complication for your children could arise if they owe student loans. Many repayment plans are arranged based on the borrower's income. If the government finds out about a large inheritance, the beneficiary could be forced to increase their monthly payments. Sure, your children might want to use some of their inheritances to pay off their student loans, but they may not have a choice in the matter if you do not use a trust to pass on your wealth.
Why Are Trusts Useful for Asset Protection?
Again, certain types of trusts can help your beneficiaries shield their inheritances from creditors. When you create a trust, you may re-title certain assets that you want to place into the trust. There are a few benefits of this: for one thing, your trustee can pass inheritances to beneficiaries outside of probate, saving everyone time and money. If you want to use a trust to help your children or grandchildren shield their inheritances from creditors, it may be good to create an asset protection trust or discretionary trust.
Many trusts offer flexibility in the ways your beneficiaries may receive their inheritances. Instead of your beneficiaries' receiving everything at once through a Will, you can stipulate that portions of the trust's assets will be distributed at certain points. For instance, the trust's instructions could allow 25 percent of the trust's value to pass on when a beneficiary graduates college, gets married, or buys a house. By holding the inheritance in a discretionary trust, the government will generally not be able to seize the trust's assets.
Through Effective Estate Planning, Your Wealth Can Live On
There are countless contingencies in the life of your children and grandchildren that may make their inheritances vulnerable to creditors. Through divorce agreements, student loan repayment plans, and garden-variety lawsuits, your loved ones may not be able to enjoy your hard-earned wealth without smart and precise estate planning. Considering a trust for your estate plan is a step in the right direction, but an estate planning attorney can help you determine the exact type of trust your situation needs. The Browne Firm has a focus on helping families create — and pass on — generational wealth.