One of our main objectives as California estate planning attorneys is to keep the estate plan simple: to help our clients meet their planning objectives with a simple design.
Why?
Complicated estate plans are hard to administer. Simple estate plans are easy to administer.
We teach our clients that they need to look past the end - to understand how the estate plan will actually play out when it's administered after they die. This means taking into account not only the literal terms of the living trust, but also the ability of their chosen successor trustee to understand and implement the terms.
Sometimes we meet with clients who have a grandiose 100-point plan on how they want the trust to control every aspect of their surviving spouse or children's lives after they die. We have to talk them down from their ivory tower and bring them back to earth.
Just as in life, you can't control everything. In fact, you can't control most things. But there are things you can control. You can:
Wait. That last bullet point sounds intriguing, right? Well, it is. And, it's something you can absolutely do, and it's not complicated.
Living trusts generally include one of three options on how to leave assets to children:
1. Outright distribution
2. Staggered distributions
3. Asset protection trusts
This is the most straightforward option. Your living trust is written so that your remaining assets are distributed directly to your children, outright.
1/3 to our daughter, Sophia, outright.
When the trust administration is completed, your successor trust will write a check to Sophia.
Simple.
This is a good option if you have a small or medium-sized estate and you know your daughter will use the money right away, such as to buy a home, pay off her mortgage, pay off student loans, or start a business.
However, if your daughter intends to invest her inheritance long-term, an outright distribution is not optimal because it will not protect it from divorce claims or lawsuits.
This option can be better than an outright distribution, especially for a younger, less mature child. Here's how staggered distributions work:
My trustee shall distribute Sophia's share in increments:
1/3 at age 25
1/3 at age 30, and
1/3 at age 35.
The logic behind this is if Sophia blows the first distribution, she has two left in reserve. And the hope is that at each interval, she will be wiser and better with money.
The downside to this is that each distribution will be vulnerable to claims by a divorcing spouse or a plaintiff in a lawsuit.
Asset protection trusts are trusts that are created out of your living trust when you die. Most of our clients choose asset protection trusts.
Establish a trust for the benefit of Sophia, and the trustee shall have the authority to make distributions to Sophia for her health, education, maintenance, and support. When Sophia turns 25, she can become her own trustee. Until then, her uncle John will be the trustee.
The asset protection trust will significantly protect Sophia's inheritance from divorce claims and lawsuits. And when Sophia reaches a certain age (most clients choose 25, 28 or 30), Sophia can become the trustee of her trust.
The main objective of the asset protection trust is to keep assets out of Sophia's name while still giving her access and control. If the inherited assets are in trust, Sophia will not accidentally comingle her separate property inheritance into community property. In California, an inheritance is separate property until it's commingled and converted to community property.
This is what often happens:
Sophia receives a big check and deposits it into her checking account until she decides how she wants to invest it. The checking account is a joint account with her husband. Once she deposits the check into the joint account, it can become community property. If they later split up, her husband can claim half of her inheritance.
This is not what she would want, and it's not what her parents would want.
Asset protection trusts will prevent the inheritance from becoming community property.
And if Sophia has a great marriage, the asset protection trust is still valuable, because the trust assets will be significantly protected from lawsuits against Sophia and her husband. And the bonus is that when Sophia dies, the trust can continue for the benefit of her children.
Asset protection trusts are not complicated because, instead of two pages of detailed instructions, they give the trustee broad discretion to make distributions for the beneficiary's health, education, maintenance, and support - a very broad standard. The key is selecting a trustee who can make wise decisions and who cares about the beneficiaries. And if the children are already old enough, they can be the trustees of their own trust, without uncle John.
If one of your estate planning goals is to protect your children's inheritance, then you need to include asset protection trusts in your living trust. If written correctly, asset protection trusts are a great way to safeguard your children's inheritance from divorce and creditor claims without making your living trust complicated.