By Harry S. Margolis
Increasingly, parents and grandparents are taking steps through their estate planning to protect their children and grandchildren from the financial risks of modern life, whether self-created or coming from simple bad luck. These can include:
- Death of a child so that property goes to the spouse (and his future wife) rather than to the grandchildren.
- Bad spending decisions by the child or spouse.
- Bad investment decisions.
- Disability through accident or illness which requires qualification for public benefits.
- Estate taxes. For those parents and children who have larger estates, funds can be subject to double taxation, first at the parent’s death and then a second time at child’s death.
Unfortunately, it’s an increasingly expensive and financially dangerous world. With the decreased benefit of fixed pensions for workers, and often the loss of such pensions due to the bankruptcies of the employers, today’s workers must depend more on their own savings, which are increasingly at risk.
Fortunately, parents and grandparents can protect the inheritance they leave their children and grandchildren by leaving them in trust rather than outright. American law has long permitted parents and grandparents to leave funds in so-called “spendthrift” trusts to protect them from the bad spending habits of their offspring. While individuals in most instances cannot create trusts for their own benefit and still protect the funds from creditors, a third party can do so. And such trusts also will provide protection from the other risks listed above.
However, there are trade offs, the principal one being some lack of control. The child cannot control the distributions from the trust and still get the protection the trusts are designed to provide. However, the child may be given some aspects of control over the trust and still maintain some protection.