Friday, April 9, 2010

A Solid Estate Plan

How Will Your Children Handle Their Inheritance?

Blog by Rochelle L. Haller

Tuesday, 08 September 2009 10:08

Many people think that the only reason to create a Will is to name guardians for their minor children. While that is definitely an important reason, there are many other things a Will can do to secure the future of your children. For example, consider the following scenario:

Bill and Sara have been married for 25 years and have two children, 24 year old Jennifer and 18 year old Michael. Bill and Sara know that they have to take the time to meet with a lawyer to set up an estate plan, but with their hectic lifestyles, there always seems to be a reason to put off scheduling a meeting. Sara had been especially concerned about not having a Will that appointed guardians for her children, but now that her children were no longer minors, she has put her concerns aside.

Bill and Sara acknowledge that although their children are “good kids”, they have caused them some grief over the years. Michael is a bit immature and only agreed to go to college after his parents relentlessly begged him to give it a try. Jennifer married very young. Her husband, Frank, controls every aspect of Jennifer’s life. While watching every penny that Jennifer spends, he has no problem spending lavishly on himself and has excessive debt. Bill and Sara suspect that Frank may have a gambling problem.

To celebrate their 25th anniversary, Bill and Sara decide to take a vacation of a lifetime … a three week European tour. Unfortunately, on the way to the airport, Bill and Sara are involved in a car accident and both are killed instantly.

Jennifer and Michael are devastated by the loss of their parents. They are also quite surprised when they discover that Bill and Sara, who lived very frugally, left significant estates. As the sole heirs, Jennifer and Michael inherit over $1 million each.

Michael, not too happy with college life, is thrilled by his inheritance. He drops out of school, rents a pricey beach front home and invites several high school buddies to move in with him. The home quickly becomes a hotspot once the word gets out that Michael and his friends host lavish parties nearly every night. Michael also decides that the 1999 Honda Civic his parents bought for him to take to college was cramping his new style, so he pays cash for a brand new Lambroghini. He soon meets an inspiring model, Ava, who convinces Michael to pay for her portfolio pictures, management fees and other costs associated with her career. Thanks to Michael’s exuberant spending, Ava makes it big but quickly leaves Michael behind. Within two years of the death of his parents, his inheritance is gone. He can’t even afford to go back to college.

Jennifer, on the other hand, wants to save her inheritance for a rainy day. Unfortunately, before Jennifer even receives the money, Frank is dreaming about how to spend it. Jennifer tries to explain that the inheritance is her property and that she would like to save it, but Frank tells her that he is the man of the house and he will spend it as he sees fit. As soon as the money hit their joint account, Frank books a trip to Las Vegas where he gambles unsuccessfully for several days. When he gets back home, he tells Jennifer about his dream of owning a sports bar. Jennifer reluctantly agrees to sink the remainder of her inheritance into her husband’s dream. Unfortunately, the bar fails within a year and Jennifer’s inheritance is gone.

If Bill and Sara had taken the time to meet with an estate planning attorney, their story would have ended quite differently. In their Wills, they could have directed that their estates be divided equally between Jennifer and Michael, but held in protective trusts. They could have named a trusted friend, family member or advisor to serve as “trustee” of the trusts. The trustee would manage the trust assets and distribute as much of the income and principal to each child as the trustee, in his or her discretion, determines is necessary or advisable for the child’s health, education, maintenance and support. At certain ages, each child would have the right to withdraw principal from his or her trust. For example, ½ could be payable when the child reached 25 years of age, with the remainder paid at 30. If Michael’s portion of the inheritance was held in such a trust until he had time to mature and make better financial decisions, it is likely that the money would have lasted much longer than it did.

If Bill and Sara told their lawyer about their concerns regarding Jennifer’s husband, the lawyer would have advised Bill and Sara to keep Jennifer’s inheritance in a trust indefinitely. She would be entitled to income and principal distributions, but only at the discretion of the trustee. With a third party acting as the decision-maker as to how her inheritance funds are to be spent, it is likely that Jennifer’s hope of maintaining a nest egg would have been realized.

Although a child’s reaching the age of adulthood relieves many worries, a parent’s responsibility for their child’s future remains. By establishing a solid estate plan, parents can help secure their children’s future, from infancy through adulthood.

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