While you can’t fully control many unfortunate life occurrences, such as death or divorce, you can plan for their possibility. An unexpected life change takes up a lot of mental and emotional energy, and trying to organize finances during this time will only add to the strain. The more prepared you are, the less stress you will have to endure, and the more in control you will feel during a painful time.
One of the best ways to have more control over the disposition of your assets — especially in unforeseen circumstances — is through trusts. Trusts have the advantage of being as flexible or as protective as you want to them to be (and the governing law permits them to be), and can allow you to put in place contingency plans to cover a variety of potential circumstances.
Awareness and Relationships Key to Success
“You need to be aware of the potential risks to your plans,” says Thomas James, senior trust administrator and relationship manager at Northern Trust. “When drafting a plan, think through all possibilities and prepare appropriate contingencies.”
James also recommends developing a long-term, close relationship with your trust team to assist with both planning and implementation. “The better the trust administration team knows the family members and their dynamics, the better able they are to navigate through the inevitably sensitive issues both when drafting a plan and at the time of an unexpected event,” he says.
Through time and interaction over the course of years, James says the trust team will have a history to use as a point of reference in determining what the practical considerations and best decisions are for the family. Although the possibilities they discuss with you can hit a nerve, such as the premature death of an heir, the close working relationship will enable you to be fully open with them and have confidence in their professional opinions.
“With a working knowledge of the family and its dynamics, we can determine what solutions are most likely to work in the real world,” James says.
You and your family should ask the “what if” questions and explore many potential scenarios so you can create different response plans. Here are some examples of scenarios you should consider:
Marriage, Divorce and Remarriage
It’s usually expected that your heirs will want to use their inheritance to support their spouse and children. Unfortunately, divorce is a common fact of life today and can complicate how your estate is allocated. According to Rutgers University’s National Marriage Project, the probability of divorce for recent marriages is between 40% and 50%, which is why it’s so critical for you to take the possibility into account when planning your trust.
In the case of divorce, you need to consider how the trust will be allocated to grandchildren who might be in the custody of the ex-spouse rather than the heir. Because of this possibility, Jeffrey Asher, a New York elder care attorney with AARP’s legal referral service, recommends using “very carefully worded provisions” appointing a trustee over the grandchildren’s share.
There is also a good chance that your heir will remarry, bringing many considerations to the table, such as a new spouse you might not know or stepchildren your heir wants to support as his or her own. Asher says you can give your heirs the right to use the money how they choose once it’s inherited, but in order to protect the money that’s still in trust in the case of another divorce, he recommends the use of spendthrift provisions. They’re useful in that “you cannot promise the money away,” Asher says. Spendthrift provisions protect the trust and the beneficiary in the event that the beneficiary is sued and a judgment creditor attempts to attach the beneficiary’s interest in the trust.*
Protecting Irresponsible Heirs
Inheriting an estate is a huge responsibility that your heir (or heir’s children if he or she is deceased) might not be ready for, depending on his or her age. (See sidebar.)
For this reason, it’s important to be clear about when you consider your heir mature enough to inherit your estate. This might be at a certain age or on the achievement of a milestone, such as graduating college. Professor Ted Kurlowicz, who teaches estate planning at The American College in Bryn Mawr, Pa., highly recommends that when you establish a trust, you be as specific as possible as to when and how often heirs are allowed access.
Occasionally, even an heir who is considered to be a mature age won’t handle the financial responsibility well. If this lack of financial maturity is because your heir has not yet matured emotionally, Asher recommends organizing the trust so he or she can’t take money out whenever he or she desires but rather when you deem appropriate, such as one third at age 35, another third at age 45 and the last third at age 55.
“Creating ‘postponement provisions’ within your will or trust can ease an irresponsible heir into the important responsibility of managing an inheritance,” Asher says. “Hopefully, by minimizing the amount the heir receives at the younger ages, he or she will mature and become more responsible by the time he or she reaches the older ages.”
If your heir is leading a less-than-desirable lifestyle, you also may have concerns about providing him or her with outright access to the trust funds lest he or she fritter the funds away. Using spendthrift provisions with your trust can help you provide for your heir’s needs while preventing him or her from having unrestricted access to the funds. Because a spendthrift trust gives the authority to make decisions to an independent trustee (meaning the beneficiary does not actually have control of the funds), you can both protect the trust from creditor claims and prevent the beneficiary from using his or her interest in the trust as a lien or security for a loan.
Death of an Heir
The premature death of an heir is not only tragic, but also can create unanticipated results for your trust and estate plans. To avoid making difficult estate planning decisions while mourning your loss, you may want to specify when establishing your trust where you want your heir’s assets to be redirected if he or she dies prior to receiving distribution. It can be as simple as naming an alternate or successor heir or redistributing the assets to other heirs, Asher says.
“The language the attorney must write might not be simple, but the instructions are straightforward,” he says.
If the deceased heir has left behind young children or a spouse, Kurlowicz says it’s common for the estate to go to the grandchildren in a trust overseen by the spouse, who can then use the funds to continue to provide for the children until they are old enough to begin handling the money themselves.
Be Specific
Attention to detail is vital, according to James. Being as specific as possible will prevent your plans from being derailed by the unexpected. James says bringing in a trust administrator or financial planner as a third party to facilitate the process will help you consider all the questions that are sometimes taken for granted.
Being prepared as much as possible will help ensure that your estate is handled according to your wishes.
*Some state laws, however, do not enforce spendthrift provisions related to alimony or child support, so check with your legal advisor to find out the specific provision in effect in your state.
