Are You Considering the Impact of Your Estate Plan on your Heirs?

When thinking about an estate plan, the top priority is usually devising strategies on how to transfer assets to heirs. It’s rare that a person really considers the consequences for the beneficiaries.

Kiplinger’s recent article asks, “Are You Forcing Unintended Consequences on Your Heirs?” An estate plan should bring about a positive outcome. However, you may be surprised to learn how easy it is to impose an unintended negative outcome on your family.

Some retirees have an estate plan that says, in essence, “What I’ve put together is enough. It’s my children’s problem to address it, when they get it. Regardless, they’ll be better off, so I’m not gonna worry.” Although that may be true, a better approach is to create intentional outcomes that advance the mental and emotional value of their wealth. This requires you to do something that can be uncomfortable—that’s talking about your wealth with your family. Many issues arise from a lack of communication and a lack of understanding of your heirs’ financial situations. Here are some examples of how you may be forcing unintended consequences on your family, when your assets transition with your estate.

Passing Unequal IRA Tax Liability to Your Heirs. When you pass on assets in a traditional IRA, you also pass the taxes and Required Minimum Distributions (RMDs) of that account. Unless your children all pay tax at the exact same rate because they are all in roughly the same income tax bracket, each of their inheritances will have a different tax liability. As a result, the amount they actually receive, after-tax, will also be different. Be sure to look into the effects of an equal split of the assets in your estate plan.

Inheriting a Vacation Home. If you own a vacation home, it’s likely you hope that your children will be able to enjoy it as a part of your legacy. Parents may directly pass a property to their children or set up a Qualified Personal Residence Trust (QPRT). However, talk to your children to see if they share the same intent for their future. A vacation home can become a burden for your children, if none of them or only one wants it.

Selling Illiquid Asset at Bargain Prices. These are assets that are hard to value and hard to sell, like real estate, collectibles and other alternative investments. If they decide to sell the illiquid asset, know that it may be at an auction or at a fire sale price, leaving your heirs with less money. Instead, think about selling these assets, while you can make sure that the fair market value is attained.

Life Insurance Proceeds Set in a Trust. You may have a life insurance policy in an Irrevocable Life Insurance Trust (ILIT), which was set up to retain the proceeds of the policy out of your estate to avoid estate taxes. Many people did this long ago, when the federal estate tax exemption was $600,000 and have failed to look over the terms of the trust since then. However, now in 2019, the federal exemption is $11.4 million per person. For many, this means the need to own the insurance policy in the trust may be unnecessary.

Protecting Wealth in Trusts That Don’t Fit with Plans. Many people use revocable trusts as a method to protect their heirs from probate. However, when you die, the trust becomes irrevocable, and the distribution of the funds is dependent upon the terms of the trust, which may create unnecessary restrictions on accessing the funds. Therefore, it’s crucial to make certain that your need for the trust is supported by its terms to address your family’s circumstances.

An effective estate plan transfers your assets to your heirs, and it also aligns the personal, emotional, and financial situations of all those involved. Remember to think about what the heirs receive.

When meeting with a qualified estate planning attorney, be certain to talk about any restrictions that you’re intentionally or unintentionally imparting on your heirs.

Reference: Kiplinger (June 13, 2019) “Are You Forcing Unintended Consequences on You

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Blended Family? Second Time Down the Aisle? Make Sure Estate Plan Is Ready

It’s always a good idea to review your estate plan, especially when a major life event, like a second marriage, is taking place and you now have a blended family. The use of a pre-nuptial agreements gives prospective spouses the opportunity to discuss one another’s rights of inheritance, and clarify a great many issues, says nwi.com in the article “Estate Planning: Planning for second marriages.”

There’s a second opportunity to sign an agreement detailing inheritance rights after the wedding takes place, called a “post-nuptial agreement.” The problem is that once the wedding has occurred and you are both legally married, you might get stuck with some surprises and, well, you’re married. For most people, it’s better to set things out before the wedding, rather than after.

There also may have been dissolution decrees in one or both of the couple’s prior divorces that have requirements which must be satisfied. A spouse may be required to maintain life insurance with the ex-spouse as a beneficiary. This can have an impact on the couple’s estate plan. It is recommended thay you have everything discussed up front in the pre-nup.

The rest of the steps are those that should be followed for any estate review.

Make sure that the last will and testament reflects your new spouse. If there are any mentions of the prior spouse, you probably want to remove them.

Verify how all of the assets are owned. Will they continue to be owned by just one spouse, or converted to jointly owned? Does your estate plan have a trust, and if so, are assets owned by the trust? Does there need to be a change made to your trustees?

Many people don’t remember how their bank accounts are titled. Fewer still can tell you who their beneficiaries are on their retirement accounts, life insurance policies and bank accounts. Remember: the beneficiary designations are going to determine who receives these assets, regardless of any language in your last will and testament. Once you die, there is no way to contest that distribution. Review your accounts and make sure that the beneficiaries are up to date.

Part of your pre-nup and estate plan review will be to discuss inheritance rights for any children in the blended family. Do you want to leave assets only for your children, or do you want to leave assets for all the children? It’s not an easy conversation to have, especially at the start of the blending process.

Remember also that blended family dynamics can change over the years. When you review your estate plan next—in three to four years—you’ll have the opportunity to make changes that hopefully will reflect deepening bonds between all of the family members. Your estate planning attorney will help create and revise estate plans, as your life circumstances evolve.

Reference: nwi.com (May 5, 2019) “Estate Planning: Planning for second marriages”

 

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A letter of instruction Smooths Life’s Bumpy Road

Letter of Instruction – It’s too bad that this happened to the Franklin family, but it happens often. A family member dies unexpectedly or becomes incapacitated at a young age and they never did the right planning.  Sometimes worse, they did the right planning, but the documents are decades old, out of step with current laws and the power of attorney is so old, that no financial institution will recognize it.

The problems that these scenarios create for loved ones are stressful, expensive and take a fair amount of everyone’s time. Solutions are offered in the article “Planning for the unexpected–4 Steps to get your affairs in order” from the Post Independent.

These four steps will help make the unexpected events of life a little less challenging.

Have a will and other estate planning documents prepared.

A will is a list of instructions to the court that details how you want your possessions to be distributed after you die. It should be drafted by an estate planning attorney who is licensed to practice law in your home state. The will goes through the probate process, which takes care of your legal and financial matters. In some states, the probate process is a simple process. In others, it can be problematic. Your estate planning attorney will be able to advise you about the probate process in your area.

A revocable living trust is a useful estate planning document that is used to establish more control over your assets, while you are alive. It should also be created by an experienced estate planning attorney. At your death, assets held in your trust then pass to heirs and avoid the probate process.

Make sure you title your assets properly.

Once you have a will and any trusts in place, any assets you wish to have placed in the trust need to be titled correctly. If you own a property with someone else and want to be sure your share of that property goes to the other owner, you’ll need to title it jointly.

Don’t forget to review the beneficiary designations that are usually a part of your bank and investment accounts, retirement accounts and insurance policies. Any beneficiary designation will override the will. If you haven’t reviewed beneficiary designations in a long time, now is the time to do so. There is no way to undo a beneficiary designation, once you have died.

Have power of attorney agreements created.

These documents give another person, the “agent,” the power to act on your business, financial and legal affairs, if you are incapacitated. The laws vary from state to state, which is another reason to work with an estate planning attorney licensed in your state. You’ll need these documents:

  • A durable power of attorney
  • A medical durable power of attorney
  • A living will

Prepare a letter of instruction.

This is not a legally binding document, but it can provide loved ones with a great deal of clarity when you have passed. Consider including this information in your letter of instruction:

  • A list of financial accounts and account numbers and any online usernames and passwords.
  • A list of important documents and where they can be found.
  • The names and contact information for the legal and financial professionals with whom you work.
  • Your final burial and/or funeral wishes.

Once you’re done, review the documents every few years and when there are major events in your life, including births, marriages, divorces, deaths and other “trigger” events. Remember that the laws change, so don’t let too much time go by without a thorough review of your estate plan.

Reference: Post Independent (July 22, 2019) “Planning for the unexpected–4 Steps to get your affairs in order”

 

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What to Know Before Becoming an Executor?

An executor steps in for the person who wrote the will and makes sure that all the final arrangements are carried out. When you agree to be named the executor or personal representative of an estate, it’s a big decision. It is far more significant than most people realize. There are many responsibilities to think about, before agreeing to take on the role. Investopedia’s recent article, “5 Things to Consider Before Becoming an Estate Executor” lists five things to consider before saying yes.

  1. Complexity of the Estate. Typically, the larger the estate—which can be in terms of property, possessions, assets or the number of beneficiaries—the harder and more time consuming it will be. The best way to see how difficult the job will be, is to request to see a copy of the current will. If there are obvious red flags, like unequal distributions to children or trusts or annuities, it may be best to say no.
  2. Time Commitment. This job takes time and energy, and requires a lot of attention to detail. Truth be told, almost all has to do with the details. Before you agree to execute a will, you should be sure that you have the time to do the job. It’s also important to review your decision to serve as an executor every time your situation changes, like when you get married, have children or change locations. It’s not unusual for a testator to change executors throughout a lifetime.
  3. Immediate Responsibilities. You may agree to be an executor, thinking that it’ll be years before you have to do any work. However, that’s not always the case. You should be sure the testator is keeping a list of assets and debts and knows where the original will, and the asset list are being held and how to access them. You should also have a list of the contact info for attorneys or agents named by the testator. You can also discuss the testator’s wishes for a funeral or memorial service, including instructions for burial or cremation.
  4. Duties After the Testator Dies. This is when the executor must make funeral arrangements, locate the will, initiate probate, manage assets, pay all debts, submit tax returns and more. This can be a snap, if you’re organized and detail oriented.
  5. How You’ll Be Paid. Each state has laws on how an executor is paid. An executor is also entitled to be compensated for expenses incurred, as they carry out their responsibilities. Executors can also refuse compensation, which is common if you’re doing this for a member of your family.

It’s an honor to be asked to be an executor. It means the testator trusts you to carry out their final wishes and to see to their legacy. However, be sure that you’re up to the task.

Reference: Investopedia (June 25, 2019) “5 Things to Consider Before Becoming an Estate Executor”

 

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How Much Will Long-Term Care Cost ?

The recent article from MarketWatch, “This is how much long-term care could cost you, and don’t expect Medicare to help,” reports that most people over 65 will eventually need help with daily living tasks, like bathing, eating, or dressing. Men will need assistance for an average of 2.2 years, and women will need it for 3.7 years, according to the U.S. Department of Health and Human Services’ Administration on Aging.

Many will rely on unpaid care from spouses or children, but over a third will spend time in a nursing home, where the median annual cost of a private room is now more than $100,000, according to insurer Genworth’s 2018 Cost of Care Survey. Four out of ten will choose paid care at home; the median annual cost of a home health aide is more than $50,000. Finally, more than 50% of people over 65 will incur long-term care costs, and 15% will incur more than $250,000 in costs, according to a study by Vanguard Research and Mercer Health and Benefits.

Note that Medicare and private health insurance typically don’t cover these “custodial” expenses. This means that such costs can quickly deplete the $126,000 median retirement savings for people age 65 to 74. People who exhaust their savings could wind up on Medicaid, the government health program for the indigent that pays for about half of all nursing home and custodial care.

People who live alone, are in poor health, or who have a family history of chronic conditions are more likely to require long-term care. Women face special risks, since they typically outlive their husbands and, as a result, may not have anyone to provide them with unpaid care. If husbands require paid care that erases all of the couple’s savings, women could have years or even decades of living on nothing but Social Security.

The earlier you start planning, the more choice and control you’ll have. Let’s look at some of the options:

Long-term care insurance. The average annual premium for a 55-year-old couple was $3,050 in 2019, according to the American Association for Long-Term Care Insurance. Premiums are higher for older people, and those with chronic conditions might not be eligible. Policies typically cover part of long-term care costs for a defined period, like three years.

Hybrid long-term care insurance. With life insurance or annuities with long-term care benefits, money that isn’t used for long-term care can be left to your heirs. These products typically require you to commit large sums or are paid in installments over 5 to 10 years, although some now have “lifetime pay” options.

Home equity. People who move permanently into a nursing home may be able to sell their houses to help fund the care. Reverse mortgages may be an option, if one member of a couple remains in the home. This type of loan lets them use their home equity. However, it must be repaid if the owners die, sold, or they must move out.

Contingency reserve. People with a great deal of investments could plan on using some of those assets for long-term care. Their investments can produce income, until there’s a need for long-term care, and then can be sold to pay for a nursing home or home health aide.

Medicaid spend-down. Those who don’t have much saved or who face a catastrophic long-term care cost that cleans out their entire savings, could wind up applying for Medicaid. Ask an elder law attorney about ways to protect, at least some assets for your spouse.

Reference: MarketWatch (July 19, 2019) “This is how much long-term care could cost you, and don’t expect Medicare t

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How Does an ILIT Work?

There are pros and cons to using a revocable trust, which allows the grantor to make changes or even shut down the trust if they want to, and an irrevocable trust, which doesn’t allow any changes to be made from the creator of the trust once it’s set up, says kake.com in the article “How an Irrevocable Life Insurance Trust (ILIT) Works.”

Revocable trusts tend to be used more often, since they allow for flexibility as life brings changes to the person who created the trust. However, an irrevocable life insurance trust may be a good idea in certain situations. Your estate planning attorney will help you determine which one is best suited for you.

This is how an irrevocable trust works. A grantor sets up and funds the trust, while they are living. If there are any gifts or transfers made to the trust, they are permanent and cannot be changed. The trustee—not the grantor—manages the trust and handles how distributions are made to the beneficiaries.

Despite their inflexibilities, there are some good reasons to use an irrevocable trust.

With an ILIT, the death benefits of life insurance may not be part of the gross estate, so they are not subject to state or federal estate taxes. They can be used to cover estate tax costs and other debts, as long as the estate is the purchaser and not the grantor. Just bear in mind that the beneficiaries’ estate may be impacted by the inheritance.

Minors may not be prepared to receive large assets. If there is an irrevocable trust, the death proceeds may be placed directly into a trust, so that beneficiaries must reach a certain age or other milestone, before they have access to the assets.

If there are concerns about legal proceedings where assets may be claimed by a creditor, for example, an irrevocable trust may work to protect the family. A high-liability business that faces claims whether you are living or have passed, can add considerable stress to the family. Place assets in the irrevocable trust to protect them from creditors.

The IRS notes that life insurance payouts are typically not included among your gross assets, and in most instances, they do not have to be reported. However, there are exceptions. If interest has been earned, that is taxable. And if a life insurance policy was transferred to you by another person in exchange for a sum of money, only the sum of money is excluded from taxes.

An ILIT should shield a life insurance payout and beneficiaries from any legal action against the grantor. The ILIT is not owned by the beneficiary, nor is it owned by the grantor. It makes it tough for courts to label them as assets, and next to impossible for creditors to access the funds.

However, there are some quirks about ILITs that may make them unsuitable. For one thing, some of the tax benefits only kick in, if you live three or more years after transferring your life insurance policy to the trust. Otherwise, the proceeds will be included in your estate for tax purposes.

Giving the trust money for the policy may make you subject to gift taxes. However, if you send beneficiaries a letter after each transfer notifying them of their right to claim the gifted funds for a certain period of time (e.g., 30 days), there won’t be gift taxes.

The most glaring irritant about an ILIT is that it is truly irrevocable, so the person who creates the trust must give up control of assets and can’t dissolve the trust.

Speak with your estate planning attorney to learn if an ILIT is suitable for you. It may not be—but your estate planning attorney will know what tools are available to reach your goals and to protect your family.

Reference: kake.com (July 19, 2019) “How an Irrevocable Life Insurance Trust (ILIT) Works”

 

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Why a Living Will Should Be Part of Your Estate Plan

There are several different legal documents that your estate planning attorney can prepare for you to direct how you want health care to be provided. The Medical Advance Directive often refers to a Living Will, but the category also includes medical durable powers of attorney, cardiopulmonary resuscitation (CPR) directives, Do Not Resuscitate (DNR) orders, Medical Orders for Scope of Treatment (MOST) and other directives regarding your medical care in the event you have a medical crisis, a terminal medical condition and just before or after your passing. The article “About the Law” from The Villager describes these important issues in detail.

In some states, a Living Will is known as an Advanced Directive for Medical/Surgical Treatment. This document tells medical professionals how you want to be treated, if you are suffering from a terminal condition that is neither curable nor reversible, or if you are in a coma, also known as a “persistent vegetative state” and cannot speak for yourself. It’s referred to more commonly as a Living Will and is signed with the same type of formality as a Last Will and Testament. Like your will, it must be signed in front of two witnesses and it must be notarized.

The Living Will is used for two situations. One is a terminal condition, where the use of life-saving procedures will only postpone death, but not promote any healing that would lead to a recovery. The second is in a persistent vegetative state, which must be determined by medical professionals. There are three choices for the family: one is to forgo life-sustaining treatment and let the person die. The second is to accept life-sustaining treatment, but only for a limited period of time. Often this is to allow family members to gather to say their farewells. The third is to continue life-sustaining treatment.

A person may express their wishes for their care and also give permission to certain persons to talk with their doctor. This is made necessary, due to the HIPAA act. Otherwise, the doctor would legally not be permitted to discuss the patient’s care with unauthorized people.

As long as you are able to make your own medical decisions, you can determine what treatments to receive, or which treatments you do not wish to receive. The goal of the Living Will is to allow you to express your wishes, if you have lost the ability to communicate.

Other estate planning documents that you’ll need are a will, to distribute your property, a financial or general power of attorney, so that someone you name can make decisions and take actions on your financial affairs and, depending upon your situation, a trust.

Because the laws governing living wills and estate planning are set by your state, you’ll want to speak with an estate planning attorney in your community. They’ll help you determine how you want your medical care to proceed, guide you in clarifying your wishes for your family and create the necessary legal documents to fulfill your wishes.

Reference: The Village (July 3, 2019) “About the Law”

 

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When You Might Want to Take Social Security Early

Most people decide to start receiving Social Security benefits when they turn 62, or when they stop working, if they’re older than 62. Social Security’s own statistics show that 70% of the 42.4 million retirees get reduced benefits, because of taking them before their full retirement age, according to a recent article aptly titled “Why You Might Want to Take Social Security Early” from Government Executive. While there are plenty of reasons to take Social Security as late as possible—as late as 70—there are also reasons why it makes sense to take it earlier.

The biggest one, is if you can’t afford to retire without claiming your benefit. There’s no need to sacrifice your financial security early on in the hope that you’ll get a big payout later in life. However, you should do those calculations carefully. A Social Security benefit along with other retirement sources, like a federal retirement benefit for federal employees, might provide adequate income. Just make sure that you’re balancing all the funds you are withdrawing and be mindful of taxes on those withdrawals.

Social Security benefits are a little more tax-friendly than withdrawals from traditional retirement savings. Delaying Social Security and increasing the withdrawals from retirement savings a little between the ages of 62 and 70 might lead to lower tax bills in your later years.

Another reason to take your benefits early, is to help family members receive benefits based on your work record. A spouse or child could receive a monthly benefit of up to half of your full retirement benefit, if they qualify. If your spouse does not have an earned Social Security benefit of their own, or if their benefit is smaller than half of yours, it may be helpful for you to claim early.

The Social Security Administration reports that of the 25 million women age 65 or older who were receiving benefits as of December 2017, 52.2% of them were entitled solely to a retired-worker benefit. About 26.5% were entitled to both a retired-worker benefit and a wife’s or widow’s benefit, and about 21% were receiving wife’s or widow’s benefits only.

Note that payments to your family do not decrease your own retirement benefit. The value of the benefits your family may receive, when added to your own benefits, may help you decide that filing early for benefits will be better.

A widow or former spouse can explore what benefits their deceased or ex-spouse has earned. In some cases, you may be able to apply for retirement or survivors benefits now and switch to a higher benefit later. If you are already receiving retirement benefits, you can only apply for benefits as a widow or widower, if the retirement benefit you receive is less than the benefits you would receive as a surviving spouse.

If you were born before January 2, 1954 and have already reached full retirement age, you have the choice of receiving only your current or divorced spouse’s benefit and delay claiming your own retirement benefit. If you were born after that, the option to take only one benefit at full retirement age is no longer available. Therefore, if you file for one benefit, you will effectively be filing for all retirement or spousal benefits.

Reference: Government Executive (July 18, 2019) “Why You Might Want to Take Social Security Early”

 

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How Do I Name a Trust as the Beneficiary of an IRA?

A frequently used strategy to save for retirement is an IRA. This money is saved to fund retirement, but there’s always the possibility that you’ll die before all the money is withdrawn. That means you must plan for what happens to that money after you are gone. Designating a trust as your IRA beneficiary is one option. It provides you with maximum control over the distribution of your assets after you die.

KTVA.com’s recent article, “How to Name a Trust as Beneficiary of an IRA,” discusses some of the important elements of naming a trust as an IRA beneficiary. Naming a trust as a beneficiary requires careful planning, so work with an experienced estate planning attorney.

Naming a trust as the beneficiary of your IRA gives you much more control over the funds, because trusts permit written instructions for how and when the money should be paid out. Designating a trust as the beneficiary of an IRA also lets you enjoy the tax benefits of an IRA, while still maintaining maximum control of funds.

This is also a good move for a person who wants to leave their IRA to a beneficiary who may need some additional direction, like a minor child or a person with special needs. Leaving an IRA to your Trust also shields the funds from creditors—a great estate planning strategy.

However, naming a trust as a beneficiary of your IRA probably isn’t a great idea or the best choice, if you want your retirement savings to go to your spouse. Spouses who inherit IRAs are more likely able to roll the deceased’s IRA into their IRA account, tax-free, especially if younger than age 70½. In that instance, designate your spouse as your IRA beneficiary.

There are several requirements to designate a trust as the beneficiary of your IRA. They include the following:

  • It must be a valid trust under state law;
  • The trust must be irrevocable (or become so upon your death);
  • The trust’s beneficiaries must be individuals; and
  • The trustee must provide a trust document or certified list of beneficiaries to the IRA’s custodian or trustee by October 31st of the year after your death.

However, there are some drawbacks to doing this: the expense of structuring and maintaining the trust and designating a trust as the beneficiary of your IRA, is much more complicated than simply naming a beneficiary of your IRA.

You also forfeit the ability for a spouse to roll over the IRA into their own IRA tax-free. This cancels out some of the tax benefits, because if you didn’t designate a trust as the beneficiary—and the IRA funds just rolled over—the tax-advantaged account would grow more quickly.

Keep in mind that just because a trust is named as the beneficiary of an IRA, doesn’t mean the funds are transferred to the trust—they shouldn’t be. Instead, they should remain in the IRA to take advantage of the account’s tax benefits, until dispersion of the funds starts.

To set up a trust with your IRA, you’ll need the help of a qualified estate planning attorney. Mistakes here can be costly.

 

 

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What Can I Do with a Trust to Help My Children with Inherited assets?

Young people like to keep things simple. Millennials don’t want their parents’ furniture or antiques. They want to be able to move easily, without a lot of headaches. Millennials are okay with jewelry, art and cash. Likewise, with estate planning, millennials want a simple will. This can be a wise choice, if they’re just married and under the estate tax threshold. However, when they have children of their own, they should consider a trust.

Forbes’s recent article, “Why A Simple Will Won’t Cut It If You Have Young Children,” explains that without a trust, minor children get inherited assets outright when they turn 18. That may be a problem, if your children are apt to blow through their inheritance in a few years, instead of using the money wisely.

However, an inheritance could last a lifetime, if the beneficiary lives within her means, doesn’t tap into the principal and works to help support her lifestyle and supplement her income. However, this isn’t always the case, and individuals with access to so much cash are often vulnerable to developing addictions.

A trustee can make certain that your children and young adults are cared for over the long-term. If you’re not alive to guide and direct your children, a trust can set the necessary limitations for their finances. The trustee can also help with your children’s financial literacy, so they’ll possess tools, if and when they’re given additional responsibility for their inherited assets.

This isn’t just for minor children who are under 18 years old, but also for young adults. The fact that a child is “legal” in the eyes of the law, doesn’t mean she’s responsible enough to invest a million-dollar inheritance. A trust sets up an experienced advisor to manage inherited assets along the way.

One option, when they’re mature enough, is to set up the trust, so they will become a co-trustee. This lets them have a say with the trustee and to make decisions about the management of the trust inherited assets. Your trust can also give them access to distributions of principal slowly over time, so they get used to managing large sums of money.

Simple solutions can work for some people, and there are definitely situations in which a simple will is appropriate. But if you have minor children, you don’t want to allow them to let them inherit money at 18.

Ask your estate planning attorney about the options available to set up a trust to work for your family.

Reference: Forbes (July 12, 2019) “Why A Simple Will Won’t Cut It If You Have Young Children”

 

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