Protecting Your Legacy from a Beneficiary's Lead Foot
You have worked hard your whole life and are proud to be able to leave a significant legacy to your beneficiaries. But imagine this: The $250,000 brokerage account you diligently built up over decades and then left to your child vanishes as a result of a split-second decision your child made to hit the gas when a traffic light turned yellow. Unfortunately, your child ended up running a red light and hitting a family in a minivan turning left. Your child is sued, and the amount awarded to the family exceeds your child's automobile policy liability limits, so the family's attorney is looking at your child's other assets (including the $250,000 brokerage account you left to them) to make up the difference. Fortunately, you can avoid a situation such as this 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 your child was the beneficiary instead of being left to your child outright, the brokerage account would not be available to satisfy the legal claim. Because the trust, not your child, would have been the legal owner of the account, the brokerage account would have been left intact to continue to grow and provide for your child as a beneficiary of the trust.
- Include specific provisions about behavior. When creating a trust, you can include specific provisions in your 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 you know your beneficiary has a lead foot, you may want to specify that the trustee may not use trust funds to pay ticket fines, court costs, or attorney's fees related to traffic offenses or increased automobile insurance premiums.
You should not leave your legacy unprotected from the occasional imprudent actions of your beneficiaries. Leaving an inheritance to your 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
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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 Counselors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
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