It has taken you a lifetime to figure out your financial strategy. You have finally reached a point where you feel confident about your approach to saving, investing, and spending your hard-earned assets. You think about all the wasted years where you either did not make any effort to be deliberate with your finances or where you made mistakes through trial and error. You want your children or other loved ones to be able to avoid making your mistakes and to begin where you ended up. A comprehensive estate plan can help you achieve this goal for the next generation in a variety of ways.
The Prudent Gatekeeper
An inheritance is like a lottery: you did not work for the money and all of a sudden – without any time to prepare – a large amount of money lands in your lap. While it certainly is not appropriate for minor beneficiaries to manage money at such a young age, it can even be a challenge for mature adults. One way to ensure that your hard-earned assets will continue to be invested and managed appropriately is to leave your beneficiaries’ inheritances in trust to be managed by a responsible third party such as a trusted family friend, a trusted advisor, or a professional trustee.
Many people mistakenly believe that this is akin to “locking away” the inheritance for a period of time. However, the beneficiary will still be able to use and enjoy the trust assets appropriately under the oversight of a responsible third-party trustee who acts as a prudent gatekeeper. The prudent gatekeeper might say: “No, you can’t use your parents’ money to buy a Ferrari; yes, you may use your parents’ money to go to college.” Any funds not spent on behalf of the beneficiary can be managed carefully in order to ensure that there will always be a source of support for the beneficiary.
Sacred Real Property
Famous novels such as Wuthering Heights and Howard’s End feature homes that essentially are characters in the stories. A family home, vacation cabin, or a plot of land can mean much more than a mere asset. Especially in California with the value of real property growing exponentially and the protections of Proposition 13 from significant property tax increases on real property that is held by the same family for a significant period of time, you might view certain real properties with reverence. You understand that if you were to sell that property today, tomorrow you would never be able to afford to buy it back. Indeed, many families have lost an incredible amount of wealth by selling real property when the better financial move would have been to retain the property.
A good estate plan can convey the viewpoint of treating certain real property with particular reverence. For example, a trust might forbid the sale of particular real property or set certain conditions that require unanimous consent of all the beneficiaries before real property is sold. A less restrictive approach might be to express the hope that the beneficiaries do not sell certain real property without a legally binding prohibition on such action.
You might have special investments that you were lucky to acquire and you know that if these investments were liquidated, it would be very difficult to find a comparable investment elsewhere. Similar to the approach of sacred real property described above, a trust might either forbid the liquidation of that investment or might convey your feelings about the investment and advise that the beneficiaries think twice before divesting themselves of such assets.
You might have found particular financial advisors to be very helpful and you want your children or other beneficiaries to be able to use the services of that advisor. A Trust can either require or strongly suggest that a particular financial advisor or investment firm be used by the beneficiaries for either a period of time or indefinitely.
Stretching Retirement Plans
Defined contribution retirement plans such as IRA’s can be beneficial to future generations provided that the beneficiaries do not liquidate them all at once. It is important that they understand the benefit of the tax deferred structure and that they are both able and willing to “stretch” these plans out as long as possible by limiting withdrawals to the minimum amount required by law.
Careful planning in designating the beneficiaries – especially when using trusts – is paramount. Furthermore, if you do not trust your beneficiaries to be disciplined when making withdrawals of such plans, a special Retirement Plan Trust might be an appropriate method to ensure that the beneficiaries maximize the advantages of such assets.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Before taking action on any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.