You've worked hard to build your wealth. When you pass it along to your loved ones, you want to make sure that it's used wisely and isn't wasted.
But most inheritances are passed along free and clear, without any protection.
This story illustrated how an inheritance can be put at risk, even where the recipient is responsible.
Jerry and Rebecca
Jerry and Rebecca have three adult children. Their youngest just graduated from college, got a job, and now rents an apartment near downtown.
Rebecca knows she should be proud. She and Jerry worked hard, and sacrificed, to get all three kids through college and out of the house.
But that doesn’t stop the feelings of loneliness and loss of purpose when she thinks about how there won’t be anymore impromptu visits to do laundry, summer vacations at home, or graduations to attend.
Jerry has started to dial things back at work. With the extra time, he notices that he doesn’t hear from his eldest daughter as much. She used to call almost every day, asking for advice, for a DIY recommendation, or just to say hi. But now that she’s married and a successful business owner, he’s lucky to get a few calls each month. He misses talking to her.
Luckily, Jerry and Rebecca have a strong social group that's there to support them. Taking the advice they received, both dove headfirst into new hobbies and old passions. Rebecca tries to play tennis a few times a week and has really taken to watercolor painting. Jerry’s upgraded his garage workshop and taken up fine woodworking. He's also been going for long bike rides on the boardwalk.
Also at a friend’s suggestion, Jerry and Rebecca decide to get their affairs in order. They had wills drawn up years ago, but they hadn’t really thought about it much since then.
Jerry remembered what a mess his cousins had to deal with after his uncle passed away. It took them almost two years—and a ton of stress—to get everything straightened out. Neither he nor Rebecca wanted that for their kids.
They scheduled an appointment with an attorney their friend referred them to. In addition to estate planning, her website said she handled divorces, real estate, and immigration.
At the consultation, Jerry said that he wanted to update the wills. Without asking any questions about their family, their concerns, or their goals, the lawyer obliged. Three weeks later, they returned to her office and signed the updated wills.
The lawyer never advised Rebecca and Jerry that a living trust could keep their kids out of court once they both passed away, didn’t discuss their estate-tax situation, and failed to mention that they could leave the children their inheritances in asset-protection trusts.
Years later, Rebecca passed away. Having been together for over fifty years, Jerry followed not long after.
Thankfully, they had kept their affairs organized. So, after they both passed, their children were easily able to identify all their assets and get through the probate process quickly.
But because they had wills, rather than a living trust, over $75,000 of their estate was lost to probate costs. Luckily, the estate-tax laws at the time were very favorable. So, their estate didn’t end up paying any tax.
After expenses, each of their three children received an inheritance of about $400,000. Because no asset-protection trusts were put in place, the children simply received a check for the lump sum.
Unfortunately, at the time the checks were cut, their eldest daughter, Emily, was in the middle of an ugly situation. She and her husband had each signed a personal guaranty of a six-figure loan for their pet-food delivery business. They used the loan to buy machinery and to move into a new warehouse. But one of their delivery drivers caused a multi-car pileup on the freeway. The ensuing lawsuits quickly exceeded the insurance-coverage limits and the business had to pay out-of-pocket to defend the suits.
Between attorney fees and the loan payment, the once-thriving business was drowning. Emily and her husband had no choice but for the business to declare bankruptcy.
The business bankruptcy took care of the lawsuits, but they both still had personal liability for the loan because of the guaranties that they had signed.
The bank wrote them a letter demanding the entire outstanding balance of $730,000.
Emily knew it would be a losing fight. It was a cut-and-dried case: the business defaulted on the loan when it declared bankruptcy and they personally guaranteed the loan. She wasn’t willing to pay lawyers to simply delay the inevitable.
And she didn’t want to risk losing her house by declaring a personal bankruptcy, which was still an option.
So, she decided to use her $400,000 inheritance to negotiate a settlement. Emily and her husband, using the inheritance and some of their savings, paid $500,000 upfront, gave the bank a second mortgage on their home, and agreed to pay off the balance over the course of ten years.
They were able to keep their house. But, the inheritance that Rebecca and Jerry worked hard to pass along to Emily was gone.
Most inheritances are passed along free and clear. This means that they are at risk of being lost to lawsuits, bankruptcy, creditors, or wasteful spending.
You can protect your loved ones' inheritances by passing your wealth using an asset-protection trust.
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