In part 1 of this blog, we talked about how Larry’s choice to create a handwritten will most certainly will result in family conflict and a long, stressful and expensive court procedure. We discussed a couple of lessons in part 1 and ended by suggesting that Larry could have left assets to his children in a lifetime trust rather than in an outright distribution. Now, in this part 2, we will explain further how a lifetime trust could benefit Larry’s kids. We will also talk about lessons from failure to plan for contingencies, such as children dying in an untimely manner.
Protection for Kids’ Inheritance through a Lifetime Trust
When someone inherits money outright, that means that they have absolute control over the inheritance. Unfortunately, this also means that their creditors have unlimited access to the assets. If the beneficiary of the inheritance is not sophisticated and doesn’t manage their money property, their assets may also be subject to their divorce proceeding.
In order to provide protection to your kids, a lifetime trust can be used for them. It can protect their inheritance from loss due to divorce, debt, illness and accidents. At the same time, it can be flexible enough to provide them generous access to the inheritance for most of their needs and life expenses. This is a gift that you can provide to your beneficiaries, which they cannot give to themselves. Here’s how it works.
When a beneficiary inherits money from the grantor, it is typically done so “outright”. Some attorneys may recommend that their clients have the assets distributed to the beneficiaries in increments, say 1/4th when they turn 25, 1/4th at age 30 and the rest at age 35. The problem with outright ownership, no matter what age, is that it leaves the assets subject to the beneficiaries whims, obligations and divorce.
For example, let’s say an inheritance passes to a beneficiary outright at age 21. Let’s further assume that the beneficiary is in serious debt when he inherits the money. If the creditor to whom the beneficiary owes money, seeks and obtains a court judgment, that creditor is going to be able to take as much of the beneficiary’s inheritance as is needed to satisfy the judgment. This could wipe out a significant amount of the inheritance.
As another example, let’s say that the inheritance passes outright to a beneficiary who is 50 years old, is married, but subsequent to receiving the inheritance seeks divorce. Depending on your state’s law and the management of the money from the time it was inherited until the divorce, the inheritance may be subject to the divorce proceeding causing a portion of the inheritance to ultimately pass to the beneficiaries spouse.
This is where the lifetime trust can help. A Trustee could be appointed to manage the inheritance on behalf of the Trustee and be given full discretion as to how and whether to make distributions to the beneficiary. This would protect the inheritance of the 21 year old beneficiary discussed above from the beneficiary’s creditors.
Alternatively, the beneficiary can be named as Trustee of their own trust with some restrictions as to distributions. This will provide a lot more flexibility and control for the beneficiary and can still provide divorce and some creditor protection.
What’s more, you can write up guidelines to the Trustee, providing him or her with clear directions about how you’d like the trust assets to be used for your beneficiaries. This ensures the Trustee is aware of your values and wishes when making distributions, rather than simply guessing what you would’ve wanted, which often leads to problems down the road.
In addition to airtight asset protection, a Lifetime Asset Protection Trust can also be set up to give your child hands-on experience managing financial matters, like investing, running a business, and charitable giving. For an in-depth discussion of how this works as well as the other benefits offered by a Lifetime Asset Protection Trust, feel free to schedule a Love & Legacy Consultation.
Although a Lifetime Asset Protection Trust would have been a great way for Larry to protect and pass on his assets to his children, such trusts aren’t for everyone. That said, contrary to what you might think, Lifetime Asset Protection Trusts are not just for the super wealthy.
Indeed, these protective trusts are even more useful if you’re leaving a relatively modest inheritance, since the smaller the inheritance, the more at risk it is of getting wiped out by a single unfortunate event like a medical emergency or lawsuit. However, if your kids are going to spend the vast majority of their inheritance on everyday expenses and consumables, such trusts probably don’t make much sense.
Meet with us, as your Lifetime Legal Counselor, to see if a Lifetime Asset Protection Trust is the right option for your family.
Larry Is Predeceased By Two of His Five Children
The final factor complicating Larry’s estate is the fact that two of his five adult children died just a few months before he did. His son Andy King, 65, unexpectedly passed away of a heart attack in late July 2020, while his daughter Chaia King, 51, died just three weeks later in August from lung cancer. Both children were from Larry’s marriage to his third wife, Alene Akins, who Larry wed in 1961.
While Andy and Chaia predeceased their father, Larry apparently didn’t update his estate plan to account for their deaths. Indeed, Larry’s handwritten will, which was created in October 2019, simply states that in the event of his death, “I want 100% of my funds to be divided equally among my children Andy, Chaia, Larry Jr., Chance, and Cannon.”
Had Larry worked with estate planning lawyers to keep his plan updated, rather than creating a handwritten will, his legal team would have ensured that his will and all of his other planning documents were immediately updated to account for the death of any of his beneficiaries. Along those same lines, had Larry worked with lawyers to amend his plan, his documents would have been drafted with provisions that would address the potential for one (or more) of his beneficiaries to pre-decease him, so even if his plan wasn’t updated, Larry’s assets would pass to the appropriate person or persons.
Based on California law, the share of Larry’s assets that would have passed to Andy and Chaia through his handwritten will are likely to pass to their children (Larry’s grandchildren), if they have any. However, this all depends on whether or not Shawn is able to successfully contest Larry’s handwritten will in court, which she has stated she plans to do. If she is successful, then Larry’s handwritten will would be deemed invalid, and his assets would be divided based on whatever previous estate plan Larry had in place.
Regardless of what happens to Andy and Chaia’s share of the estate, Larry’s plan should have been amended to account for their deaths. This brings us to our third and final estate planning lesson.
Lesson #3: Review your plan annually to make sure it’s up to date, and immediately modify your plan following events like births, deaths, divorce, and inheritances.
As Larry’s case shows, your plan won’t do you any good if it’s not regularly updated. Estate planning is not a one-and-done type of deal; your plan must continuously evolve to keep pace with changes in your family structure, the legal landscape, your assets, and your life goals.
And unfortunately, this kind of thing happens all the time. In fact, outside of not creating any estate plan at all, one of the most common planning mistakes we encounter is when we get called by the loved ones of someone who has become incapacitated or died with a plan that no longer works because it hasn’t been updated. Yet, by the time they contact us, it’s too late.
We recommend you review your plan annually to keep it current, and immediately update it following major life events like births, deaths, divorce, and inheritances. We have built-in systems and processes to ensure your plan is always up to date, so you won’t need to worry about forgetting anything.
If you’ve yet to create a plan, have DIY documents you aren’t sure about, or have a plan created with another lawyer’s help that hasn’t been reviewed in more than a year, meet with us, as your Lawyer for Life. We can ensure that your plan stays 100% current, so it works exactly as intended no matter what.
Don’t Do It Yourself
As Larry King’s story demonstrates, do-it-yourself planning can have terrible consequences for your loved ones—and in the worst cases, it can be even worse than if you had no estate plan at all. To ensure your plan works exactly as intended, contact us, as your Lawyer for Life, to review and update your current plan, or create one if you have yet to do so.
With a Lawyer for Life on your side, you’ll have access to the same planning tools and protections that A-list celebrities use, which are designed to keep your family out of court or conflict no matter what happens. Contact us today to learn more.
Bromlow Law, PLLC and Laura L. Bromlow, are dedicated to the practice of Elder Law and Estate Planning. Our practice is comprised solely of working with clients in these and closely related legal fields. Laura L. Bromlow is a Certified Elder Law Attorney with the National Elder Law Foundation. Bromlow Law, PLLC strives to enhance communication among family members and loved ones and to keep them all out of conflict so they can stay out of court. We want to help you keep your close circle safe! You can reach us at (281) 665-3807 or [email protected].