When In-laws Become Outlaws
"How much will I get, and when will I get it?" Adult children generally know better than to ask this question directly of their parents, but no one would blame them for wondering. At first blush most people would like to receive their inheritance as a bag of cash, no strings attached, and many parents believe that leaving a bequest in trust would offend their loved ones by implying a lack of confidence. Counselling-oriented estate planning, however, offers both the parents and adult children new options to transmit family values through the generations, while avoiding the potential harm of a large inheritance. A bequest can upset the comfortable balance of a happy marriage and give rise to envy by one spouse, and defensive strategies by the beneficiary to preserve the patrimony in case of a divorce. Both reactions may create a self-fulfilling prophecy. Sending money to the next generation with the protection of a trust makes the bounty available to loved ones for their needs while putting it beyond the reach of a divorce court.
Receiving a substantial inheritance cushions the loneliness from the loss of a surviving parent. The gift allows the adult child to pay off some debts, fund the education of the children and pursue new opportunities. For the married beneficiary this happiness usually depends upon the continued stability of the marriage, but the infusion of new cash can have the opposite effect. How long after the estate check clears does it take for the following conversation to happen: "Honey, now that we have the money, we really do need a bigger house. Think of the children." How can a responsible and loving spouse say "no?" When they leave the title company with the deed to the new house, who shows as the owner? In all likelihood they will own it as husband and wife … as joint owners. Keeping the money as a separate asset appears selfish and creates an inequality of contribution and power in the marriage. So the beneficiary will find it hard to avoid co-mingling the inheritance and purchasing new assets in joint ownership, either out of genuine sharing or to avoid conflict. In a later divorce proceeding the non-beneficiary spouse will claim these assets as marital property and will have a strong negotiating position. "That’s my inheritance." "No, we spent the inheritance—that’s our life savings." And what can the judge say? "Share and share alike." Think of another possibility. The beneficiary dies prematurely and the surviving spouse (the one the parents never liked) remarries. The same process of co-mingling and joint ownership may happen again. Pray for the good health, good luck and good judgment of the child’s in-law, because if he or she dies next, the new stepparent owes the grandchildren nothing. The outright gift of a substantial inheritance can bring both relief and new anxiety to the recipient, and loving parents can balance the joy of giving with the caution of structuring the bequest to do the most good and the least harm.
Consider a different form for the bequest. The beneficiary receives the inheritance in a lifetime protective trust, with access to the principal for "health, education, maintenance and support." The trust buys and keeps title to the new home. Same subdivision, school district and parish. But mom and dad established the trust in their estate plan, and the trust owns the house for the use and benefit of the beneficiary. The young family moves in and lives happily ever after. Perhaps. But if they do not, then at least the inheritance will not have made it worse or put the beneficiary on the defensive, because a divorce court will not have jurisdiction over the trust property. Similarly, the death of a beneficiary with dependent children can devastate a family. For the surviving non-beneficiary parent, the trust can ease the economic impact of the spouse’s death by supporting the grandchildren and carrying your legacy forward to another generation. When parents bring their adult children into the estate planning process and the adult children learn and understand the advantages of trust-based planning, they welcome the many protections that come to them. At the parents’ death the beneficiary also becomes trustee and will have the use and control of the money without the exposure of ownership. Receiving a legacy in trust relieves the beneficiary from the pressure of co-mingling the money with marital property and risking its loss in a divorce, or causing friction by keeping it as separate property and upsetting the economic balance of the union.
When parents name their adult children as trustees of their own trusts, what responsibilities does a trustee have? The trustee must exercise good stewardship over the money to preserve it for the next generation, and giving the beneficiary a limited power of appointment allows the planning to continue while keeping the money in the family. For stability the parents may provide for a professional financial advisor, or even a co-trustee for additional asset protection. If the trustee faithfully observes the terms of the trust in spending the principal, then the trust money will not become a part of the beneficiary’s own taxable estate at death because the money still "belongs" to mom and dad, and they will send it to the next generation without any new estate tax. So the trustee must approve all expenditures (by looking into a full-length mirror), document the purpose, and keep good records. The records will show that the beneficiary received distributions of principal for "health, education, maintenance or support." These "ascertainable standards" allow great flexibility, but by imposing loose restrictions they keep the money separate from the beneficiary’s own property. If this sounds like a burden, then the co-trustee can help. Living with a trust causes the beneficiary no inconvenience beyond keeping good records, and assures both long term family security and preserving the money in the parents’ bloodline.
Leaving an inheritance in a protective trust provides for the beneficiary’s needs while separating the money from marital property and preventing it from upsetting the marriage. In this way the adult children can have the use and control of the family wealth without the negatives of title ownership. Parents can make estate planning into a family project and involve their adult children in the same client education and counseling that they go through, and enlist the family’s support in making their estate plan work. Then everybody can focus on how they want it to turn out after the surviving parent dies. Planning as a positive exercise neatly finesses the whole issue of marital balance and divorce protection while creating a family legacy that carries out the parents’ love. Adding the question, "How will I get it?" and answering with a multigenerational plan, brings legal, financial and emotional peace.
Used here by permission of and with our sincere thanks to the late author Richard Boardman, J.D. of St. Louis, Missouri. Mr. Boardman was a Charter Member of the National Network of Estate Planning Attorneys.