Living Trusts Typically Do Not Provide Asset Protection

I am often asked whether a living trust will protect assets from nursing home costs, lawsuits, or other risks.  The general answer is “no.”  A living trust is designed to help organize your assets and prepare for a time where you may face a disability or when you pass away.  A living trust is under your control.  You can add or remove property from the living trust, and you can amend or revoke the trust at any time.  Because of this control, there is generally no asset protection for you while you are alive.  (However, the trust can set up wonderful asset protection for your spouse or children after you’re gone.)

Whether we are talking about business risks, possible lawsuits, personal liability on loans, nursing home risks, or other asset protection concerns, any asset where you have control is going to be subject to those risks and creditors.

In order to achieve asset protection during your life, you need to take steps other than using a living trust.  Those could include various steps, like using an irrevocable trust (where you give up some control) or using other legal or financial tools to minimize or avoid risks to your assets.

To read more about trusts, check out our article, “Living Trusts” or “Your Bucket List for Estate Planning: Why a Trust Might be Right for You.”

To read more about asset protection, check out:

“Asset Protection: What is it and why do I need it?” or “3 Real-Life Examples of Important Asset Protection Planning

Wealth Transfer or Wealth Reception – Part #2 – The College Years

I went to U of I in Champaign-Urbana. Both undergrad and law school. A lot has changed since I left law school in 1995. Many new buildings, and tuition has gone way up. Do you know how much it will cost now for 4 years of undergrad, including tuition, books, room and board, etc.? Somewhere around $100,000.

Suppose your kid is ready to head to college this fall. He gets all his stuff packed, buys that little fridge, picks out a shower caddy thing, and is ready to head off to college. The day comes where you pack up the mini-van and head to Champaign. You help carry all the stuff into the dorm, give him a hug, tell him to behave himself. Then you pull out your checkbook and say “Well, since we know it’s going to cost you about $100,000 to get through the next 4 years, I thought I would go ahead and give it to you now.” So you write out that check, hand it over, get in the car and drive back home.

Assuming you had $100,000 sitting around that was earmarked for your child’s college, would you do it this way? Would you hand the entire amount over on the first day he moves in to the dorm? No? You wouldn’t do that? Why on earth not?

Well, I guess there could be a few “complications”.

1. He might not spend it wisely. You know, parties or a new car or who knows what? Then runs out of money before he gets the degree.

2. He might be taken advantage of. If word got out that he had a big wad of money just handed to him, do you think he would have any new “friends” that might be interested in hanging out? I’m sure there would be plenty of kids willing to help him make some financial decisions.

3. He might be less motivated to work hard. Hey, you’re only young once. Doesn’t it make sense to have some fun with a little of that money now? He figures he can always get a job during his last year or two of college to make up the difference.

4. What if he gets in trouble? Maybe gets in a car wreck and gets sued? Or gets in with the wrong crowd and makes a bad decision that leads to property damage or criminal charges?

5. He isn’t emotionally ready to handle that kind of money. You just handed him $100,000, even though he’s never had more than $500 in discretionary money to himself before now.

6. What if his plans change? Maybe he flunks out, changes his major, takes a semester off, or drops out of school to start a band? Are you expecting to get change back on your $100,000 if he doesn’t finish with a degree?

7. He might fall in love. Yes, love can do strange things to someone’s financial decisions.

WEALTH RECEPTION?

Well, I guess you realize that people die all the time leaving assets to their kids. And those kids may not be any more ready to receive it than your college student was to receive that $100,000 right now.

Let’s say something happens to you tomorrow and you left all your assets (house, retirement plans, life insurance, bank accounts, etc.) to your kids. Would the amount of money you leave them make an impact on their daily lives? How much impact? Very little, some, or a whole bunch? Would the lifestyle they could afford be changed?

Think of the specific amount of money you would leave if you died tomorrow. How much will it increase your child’s net worth? Double it, triple it, make it go up 10 times or a 100 times? or more?

All those issues that cause concern about the college student are the same issues we address with clients in estate planning. These issues are what I call “wealth reception” issues. It’s not just about how quickly we can get the check to the kids. More important is what impact, good or bad, will the money have on the kids after they get it. And will the wealth better their lives one year, 5 years, or 10 years after you’re gone?

Protecting Your Family Like an NFL Lineman: 4 Risks to an Inheritance

The other day I had a chance to speak at the Rotary Club. My topic, like the article “How (and Why) Athletes Go Broke” in the latest issue of Sports Illustrated, was about protecting the money you’ve worked so hard for. There are many ways your spouse, children or grandchildren could end up losing what was so important for you to leave behind. I know you can’t imagine your loved ones blowing your hard earned money (or maybe you can), but sometimes it happens in the blink of an eye. What are some of the risks to an inheritance?

There are generally 4 risks to an inheritance:

1. Lawsuits

The SI article is riddled with stories of lawsuits. Though it may not be something you think about, imagine your spouse, devastated by your recent death, running a red light and causing an accident involving a school bus. In an instant, all that you worked so hard for could be given away by the courts to the injured parties leaving nothing to care for your family in your absence.

2. Divorce

One NFL owner was once asked by one of his players what the most dangerous thing to happen to them financially could be. His answer: Divorce. Many players, who marry their hometown sweetheart, can never imagine a divorce in their future. Even if your son has married the sweetest girl in the world, there is no way to see what the future holds. Would you be OK giving half your hard earned money to her if they end up getting divorced a few years after you pass away? It happens regularly when people don’t plan ahead.

3. Remarriage

If you die, and your spouse remarries, do you mind if part of the money you left is split with the new spouse, or even later left to the new spouse’s kids? This could either be a gold-digger (or “bimbo” as some of my clients like to say) or a stand up, class-act new spouse. But either way, without planning, there is a risk those assets will end up where you did not intend. Your children could even lose access to the money they would need for college.

4. Wild Spending

Lots of quick money means a happy life, right? Well, that’s not what the stats show. Quick money (winning the lottery, getting an inheritance, or multi-million dollar NFL contract) can lead to wild spending, divorce and bankruptcy. If your children end up with large assets at the young age of 20, they could quickly blow it like any upstart professional athlete. If someone isn’t prepared to manage the money, the money will manage them. You’ve worked hard so your kids will be ok without you, but will they really be better off with a large sum of money that has no safeguards?

Nobody likes to think about these difficult issues, but with proper planning these assets can be protected and your loved ones will be protected – even if you can’t be around to do it. Give us a call at 217-726-9200 or make plans to attend an upcoming workshop on the basics of estate planning, so you can make sure your family is protected.