How Your Clients Can Protect Their Legacy from a Beneficiary's Lead Foot
Your clients have worked hard their whole lives and are proud to be able to leave a significant legacy to their beneficiaries. But imagine this: A $250,000 brokerage account your client diligently built up over decades and then left to their child vanishes as a result of a split-second decision the child made to hit the gas when a traffic light turned yellow. Unfortunately, the child ended up running a red light and hitting a family in a minivan turning left. The child is sued and the amount awarded to the family exceeds the child's automobile policy liability limits, so the family's attorney is looking at the child's other assets (including the $250,000 brokerage account left to them by their parents) to make up the difference. Fortunately, your clients can avoid this situation by taking the following steps:
- Hold an inheritance in trust instead of giving it to a beneficiary outright. Had the brokerage account in the above scenario been held by a properly drafted trust of which the child was the beneficiary instead of being left to the child outright, the brokerage account would not be available to satisfy the legal claim. Because the trust, not the child, would have been the owner of the account, the brokerage account would have been left intact to continue to grow and provide for the child as a beneficiary of the trust.
- Include specific provisions about behavior. When creating a trust, your clients can include specific provisions in their trust agreement that will either encourage or discourage certain kinds of behavior. For example, the trust could include a provision that limits distributions to a beneficiary if the beneficiary is issued more than three traffic tickets in a year.
- List the things the trustee cannot pay for. For instance, if your clients know that their beneficiary has a lead foot, they may want to specify that the trustee may not use trust funds to pay ticket fines, court costs, and attorney's fees related to traffic offenses or increased automobile insurance premiums.
Your clients should not leave their legacies unprotected from the occasional imprudent actions of their beneficiaries. Leaving an inheritance to their loved ones outright exposes that inheritance to the claims of sometimes unscrupulous creditors, but this unfortunate outcome can be avoided by using a well-drafted trust.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
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