Securing Your Children's Inheritance
The fate of the estate tax is still up in the air. As noted in our last two Newsletters, rates are scheduled to go down and exemptions up during this decade. The tax goes away for one year (2010), then comes back. This strange and complicated arrangement will surely change still again before 2010. We don't know how.
We shouldn't allow this uncertainty to distract us from matters even more important than taxes. Matters like securing your children's inheritance, whatever the taxes and whatever the net amount of inheritance.
1. Why do I need to "secure" my children's inheritance? Unfortunately, chances are good that, in any given family, one or more of the following risks will present itself:
(a) A child's divorce.
(b) A child's trouble with creditors.
(c) A child's inability to manage money effectively.
(d) A child's loss of motivation due to dependence on family money.
2. Should I use a trust? A trust is an obvious solution, so yes, you should consider placing all or part of your children's inheritance in trust.
3. What sort of trust might I use? You may tailor your family's trust to your wishes. It may hold each child's inheritance until he or she reaches the age of, say, thirty-five. It may last longer, perhaps even for the child's lifetime, paying him or her its income, or a specified percentage of its total value each year. It may make education a priority, or encourage other accomplishments. A "generation-skipping" trust for your children's lifetimes offers the added benefit of passing as much as $2 million on to grandchildren without being taxed in your children's estates.
4. Are there protective arrangements other than trusts? Yes, they include the following:
(a) A family partnership is an arrangement by which the family may share ownership of investment assets. The parents may continue to manage the assets, and make periodic cash distributions to the family partners in proportion to their ownership. The partnership agreement will likely include restrictions against transfer, to keep ownership in the family. A family partnership also provides an excellent forum for the financial education of children.
(b) Your children's own estate planning can help to give them security, particularly if they get married. A premarital agreement might be appropriate before the wedding. The children's wills and other documents should be made with great care. In particular, no community property agreement should be signed without considering its effects on ownership and the possibility of divorce.
This Newsletter touches briefly on some critical family-and-money issues. We will explore these ideas further in a seminar for clients in May. You will receive an invitation to this seminar during the first quarter of the coming year.
Of course, if you'd like to talk further at any time about your estate planning, we welcome you to call the attorney with whom you work, or Julie Dickens, Al Falk, Alan Macpherson, Mario Parisio, Eileen Peterson, or Sandy Rovai, all members of our Trusts & Estates Group. Thanks.