Commentary: When You’re Setting Up an Estate Plan, Avoid Making This All-Too-Common Mistake

Most of us have someone (or multiple someones) that we care about whom we want to provide for after we’re gone. Perhaps that person is a child, or an elderly relative. No matter who it is, the goal of an estate plan is to spell out what we want to pass on to them, and how.

Unfortunately, there are many ways that our heirs (also known in legalese as “beneficiaries”) can get into trouble with our estate. One such way? Being preyed on by third parties.

As much as we might not want to admit it, it’s a rough world out there, and lots of third parties—from creditors to professional estate predators to divorced spouses—can prey on even the most responsible heir. You should protect your legacy as best you can from such persons.

Of course, every person’s situation is different, so it’s a good idea to consult with an experienced estate planning attorney. However, there are a few things to keep in mind as you set up your estate plan to help you avoid making the all-too-common mistake of leaving your heirs vulnerable to predators of all types.

Divorced Spouses

One of the first predators to guard against: divorced spouses. No matter how much we all wish it were not true, about 50 percent of marriages end in divorce. And in 100 percent of divorce cases, the structure of marital property matters. So does the structure of any inheritance either spouse may receive. So, let me ask you: how are the marriages of your beneficiaries?

Suppose, when you die, your estate generously gifts $500,000 to your wonderful niece, Sandra. After your funeral, when your will is read, Sandra loves you all the more. During payout by the executor, the money passes quickly into Sandra’s joint bank account with her husband.

So far, so good. But what if, a short month later, Sandra’s husband files for divorce? Has that $500,000 suddenly become marital property and fair game in the divorce proceeding? Maybe, and maybe not.

What if Sandra and her husband put that money directly into paying off the mortgage on their house—but the house goes to the husband in the eventual divorce settlement? Has Sandra lost most or all benefit from the $500,000 you left her? Very possibly, yes.

What does a potential scenario like this mean for you and your heirs? Laws vary by state, but in general, if (and only if) an inheritance has been properly structured through a trust, it does not become part of marital property, and it can be protected from loss during a divorce.

Creditors and Predators

Ex-spouses aren’t the only ones who may try to prey on your heirs. Unworthy creditors and professional predators are also a danger, which means you must create a trust in a manner that will protect your beneficiaries from them.

Please understand me: I’m not talking about people or businesses to whom your heirs have stopped paying bills. I’m talking about the many ways in which your heirs may become responsible for something not their fault at all.

Unfortunately, thanks to the way we’ve set up our society and our legal system, this happens all the time.

Many times, people are held liable for things that are not what any normal person would consider their responsibility. But creditors, predators, and courts do. Indeed, people are often pulled into lawsuits which honestly baffle them.

A physician works as part of a team in an operating room, and hours after she’s done her part of the job and left the hospital, something completely unrelated goes wrong. Usually, the patient’s attorney will sue her along with everyone else, including the anesthesiologist, the hospital, everyone—figuring someone will be nailed for the money. The same may be true if you are a part owner of a business that you do not manage personally.

In my noble profession, legal strategies often revolve not around who did the deed, but who has money to pay for the consequences. Unless you do your estate planning right, you can make your heirs into targets, just by giving them your hard-earned stash.

Identifying Other Predators

Beyond creditors and lawyers, we see professional predators who actively seek out money from estates, especially if those estates go to probate. And once in probate, the names of all estate beneficiaries and all the details of the finances are made public—right down to the date each person inherits and the specific amount of that inheritance.

Professional predators gather probate information, and then show up with scams of all kinds, from land deals to bogus lawsuits. They might appear right at the probate hearing, with some surprise debt you yourself might not have remembered if you had been alive and standing there in front of the judge.

Then there’s the government. Governmental agencies and their lawyers are just like everyone else: they look for significant piles of money and go after them. Their tactics may include everything from estate “death” taxes to collecting income taxes on inherited IRA distributions.
I’m a patriotic guy, but guess what? As a lawyer protecting my clients, I have to list the IRS under “predators,” too.

High-Maintenance Spouses

As an attorney, I sometimes have to push honesty into the “brutal” category. Here is one of those cases. Under the predators who can destroy an estate, I am going to list “high-maintenance spouses.”

What’s a high-maintenance spouse? It’s a husband or wife who really, really likes to spend money, especially your heir’s inherited money. Such a spouse can be found on any rung of the socio-economic ladder—rich, poor, middle-class, it doesn’t seem to matter.

We’re not talking about divorce here, we’re talking about the unintended consequences of marriage. One time, a woman found me after I spoke at a seminar, and said, “My daughter inherited about $300,000 from her dad, and her husband got hold of it. He bought a truck, a bass boat, and partied until the money was gone.” She paused. “Seriously, all that money’s gone.”

“Now, my daughter has come to me and said, ‘Mom, I don’t want the same thing to happen again when you die and leave me money. I’m 60 years old. I’ve been working hard my whole life waiting tables and doing housecleaning. I’m worn out. I can’t work anymore. Mom, will you please set up your estate plan in a way that protects me?’”

I was blown away by this conversation. It’s pretty rare that a beneficiary has that kind of self-awareness, along with the humble wisdom to come to her mom for advance planning in this way.

Keep Your Heirs Safe

I set up a trust in this woman’s estate plan that held about a million dollars for her daughter’s benefit. But here’s the key: her daughter could not remove any of the money, because someone else was the trustee for her funds.
We figured that if the million were properly invested, her daughter could take out 4.8 percent, or $48,000 a year.

The language of the trust permitted her to receive $4,000 a month—plenty to live on, within her lifestyle. And since she herself was blocked from accessing the money, her husband could never pressure her for another big purchase.

Her daughter’s reaction was superb. “Oh, my goodness. That’s such a blessing,” she said. “I’ve never even made $4,000 in a month while working. Now I know I’m going to be comfortable. Now I know I’m safe and secure. If my husband gets hold of that $4,000 this month, I’ll know I’ve got another $4,000 coming in next month. This makes me feel so happy and safe as a daughter.”

The client was equally thrilled. She said, “Wow, now I know I’m providing for my daughter. She’s in a tough situation that she can’t get out of, but at least I’ve made it easier instead of harder.”

Other lawyers call a trust like this a “general needs trust.” I like to think of it as a “dole-it-out trust.” You dole a little bit of money out every month to your beneficiary for the rest of their life. Result: they are protected from a predator.

Consider an Inheritance Protection Trust (IPT)

Of course, this isn’t the only way to protect your heirs. Another option? An Inheritance Protection Trust (IPT). Like the dole-it-out trust I just described, the IPT includes a spigot to let money out in a controlled way. Unlike that trust, however, your heir is the initial trustee and always remains the beneficiary.

This means they benefit from the trust and while things are okay, control the trust. Because the trust is irrevocable, it creates the foundation of an asset protection for your heir—something they cannot do so easily on their own.

You must, however, set it up in advance for your beneficiary. The trust cannot be changed, and your beneficiary cannot add their own assets to the IPT.

The only person who can reach into the IPT bucket and get any money out is the trustee. High-maintenance spouses, lawyers, and other predators can’t touch the money. Why? Because your heir does not own the money, the trust does. And the trust is irrevocable—it cannot be changed to give other people access.

Create a Properly Constructed Trust

A fellow lawyer once said, “If you love someone, don’t leave them anything.” After reading about the predators out there, you may now understand his joke.

He was not referring to the angst associated with money. He was referring to the fact that whatever is actually in your name, someone else can take from you. A divorce court can take it. A predator. A creditor. A free-spending spouse. If you need to protect your heirs, you should consider putting your legacy into the separate bucket of a trust.

A properly constructed trust can offer your heirs a lot of protection after you are gone. It can build a moat and a wall around the assets. But to pull this kind of thing off, you must get your living trust right—the first time. Don’t assume that anything is “generic,” and for heaven’s sake, use an attorney.

For more advice on how to properly set up your estate plan and keep your heirs safe, you can find the 2nd edition of Savvy Estate Planning on Amazon.

Author James L. Cunningham, Jr. has been an attorney for more than two decades in the areas of estate planning, probate, trust administration, elder law, disability/special needs planning, and much more. He is one of the few attorneys certified by the State Bar of California as a Specialist in Estate Planning, Trust, and Probate Law. As founder of CunninghamLegal, he oversees six offices, along with a team of attorneys and professionals focused entirely on estate issues. James is a California native, a devoted husband, and the father of three children. You can learn more about his work at www.cunninghamlegal.com.

This Commentary is adapted from Savvy Estate Planning.

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