By: Andrew Rosen, CFP®, CEP®

As a lifelong financial planner, I’m privileged to be part of the complete picture of client’s lives. Unfortunately, it does means facing the lows along with the highs. The discussion and arrangement of a client’s disposition of assets (while unpleasant to think about) is extremely necessary. One common question often asked is: what is the most recommended way to leave assets to children?

Drafting wills isn’t something I do; I leave that exciting work for the attorneys. Although, I have been part of the estate planning process many times. I may even hold the record for being a signing witness in more wills than anyone else in the tristate region! Part of the comprehensive financial planning process (and the CFP® and CEP® designations), surrounds the guiding of clients through this very process.

Structuring Assets for the Next Generation

Many of our clients have amassed a large amount of wealth, while others are still accumulating. However, with life insurances these clients are still worth a pretty penny if something should happen to them. (I’ve even had to consider these options for my family. While, I am far from leaving them wealthy from my savings alone, I do have a healthy amount of life insurance. This creates some decisions on how I leave it to my kids.)

The issue at hand isn’t “who to leave your assets to.” Generally, that is an easy decision for estate planning. If you are like most, it all goes to your spouse. Then at your spouse’s passing, equally to your children. This order of asset flow makes perfect sense. In my case, I need my wife to still be able to raise three beautiful children. At her passing, I want any residual assets left to my kids.

Let’s use me as an example. How will I leave those assets to my children? If something were to happen to my wife and me at the same time, at age 18 my three children would stand to inherit a large sum each. (For fun, let me tell you what that would look like today. My seven year old, Aviva, would move to Los Angeles and try to make it as a musician. Along the way, she may spent half of it on ice cream. My four year old, Isabella, would buy a home for her stuffed animals and become a ballerina. Lastly, my one and a half year old, Emmet, would blow it all on shoes, stylish vests, and Oreo cookies, no doubt.)

The Responsibility

The problem is the same one lottery winners and athletes face all the time. In a very short period of time they receive large sums of money. Attached to this wealth is a responsibility that is regularly misunderstood. Tragically, we often hear about these people going broke, despite at one point having unimaginable amounts of money. While most of us aren’t likely leaving tens of millions of dollars behind, the principals are the same. These children are given our life’s savings all at once, but aren’t given the education or discipline to go with it.

Even if this next generation is very responsible (as many reading this have adult children), leaving these assets outright doesn’t protect them from others. Specifically, I’m referring to “creditors and predators.” These inheritors aren’t protected against a law suit from someone else, as these dollars are now part of their estate (and thus fair game if ever sued). One more thing, these dollars aren’t protected against a bad marriage (as these dollars can also be considered marital assets in many cases).  Reminder 50% of marriages still end in divorce.

Is there a way to protect your children’s (young or grown) inherited assets from bad financial decisions, lawsuits, creditor issues, and divorces? Yes, there is!

Trust Planning

That protection vehicle is called a Trust. We’ve all heard of them. Many still assume they are only for the mega-wealthy and wrongly conclude their assets fall short to even consider using a trust.

Well my friends, think again!

As long as you have some assets you want protecting, you can add a testamentary trust to your wills easily. Basically, this spells out that at your death, you want your assets not to go directly to your heirs but rather be left in a trust.

Leaving assets in trusts can protect those assets from your children making bad financial decisions and/or exposure. A trust has its own Social Security number called an EIN number. Therefore, if you are being sued or are divorcing, these assets aren’t yours (they are owned by the trust). As long as they stay in that trust (and assuming proper language), they continue to be excluded from your estate and thus protects from all these worries.

Who Benefits

With this type of trust, your children become the beneficiaries. This means they don’t own the asset itself (no one does). However, they get all the benefits from the assets. For example, all income is distributed to them annually. Additionally (and again depending on the language), the trustee(s) can allow your children access to the principal for normal expenses–such as health, education, maintenance, and support. In short, it will provide them what they need, not what they want. This can be left to the discretion of trustee(s), so think carefully when determining who gets that power.

One other important note, you don’t have to leave the assets in a trust forever (not that it is a horrible idea). As a matter of fact, I often recommend giving out portions at certain vesting ages. (I chose 30, 35, and 40 as when my children can receive equal portions of the trust. I figured let’s see if they are responsible enough to handle a portion outright. I may alter this in the future based on my children’s proclivity for dessert food, but for now I am comfortable here.)

Trusting the Trust

Hopefully, this has given you a lot to think about when it comes to the dispersion of your assets. There is no “one size fits all” recommendation. However, in most cases some sort of trust utilization is a great way to protect your heirs from themselves. I’ve seen this go wrong too many times to recommend otherwise.

Remember, it’s not what you leave behind, it’s how you leave it!

Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients.  He coaches them through all stages of life and guides them to better achieve their life goals.  For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
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