Shaping trusts, changing wills
Dear Len & Rosie,
We have three grown children with children of their own and we have a trust. We want our children to be the beneficiaries but want to set it up so that, should they divorce, the spouse would not have a right to the inheritance. I know that an inheritance comes into the marriage as separate property but I thought that, if the pool is used for community expenses, mortgage, etc. that the whole thing could become community property. Yuk. Is there a way to ensure that it will stay separate property? We don't mind if our children purposely use the funds for their families, but would like to set it up so that they can keep the remainder of the inheritance should they divorce. What should we be looking for?
Most parents think the way you do. They don't want to look down from above and see their ex-son-in-law driving a Lexus bought and paid for with their daughter's inheritance. Normally, you do not have to worry about your childrens' spouses inheriting anything from you. They will get nothing upon your deaths, unless you specifically say so in your wills or trust. What you have to worry about is what happens to the inheritance once it's in the hands of your children. An inheritance is separate property, but many children, either by mistake or on purpose, commingle their inheritance with community property assets, or even transmute their inheritance to community property. There are a couple of options available to you to help your children not do this.
The first is education. The trick to keeping separate property separate is to keep it separate. While that may not make much sense, it can be pretty simple. Your children should know to put any inherited assets into brand new accounts in their names alone, preferably at different financial institutions. Then, they need to know that they should never put anything else into these accounts that may be community property. If your children create trusts to avoid probate, these accounts should be identified as being their sole and separate property. A better alternative is for you to leave your children their inherited assets within a family protection trust. The idea here is that if your children receive their inheritance within its own trust, with each child being his or her own trustee, your children will have a safer means of protecting the separate property nature of their inheritance. It's meant primarily for the "good" children who are able to manage themselves. The trust will make payments to your child for purposes of support and education. The trust can buy a home for your child to live in, but it's best for the home to be held within the trust. That way, if a child is divorced, his or her inheritance from you will be protected. There are three other principal benefits to a family protection trust. First, since the child doesn't really own his or her inheritance within the trust, it's largely protected from creditors through the trust's spendthrift clause, except for taxes and child support debt. Second, all or a large portion of the trust assets can be exempted from estate tax when your child passes away.
On top of all this, you have the ability to place restrictions on how your children may dispose of their inheritance upon their own deaths. You can prohibit your children from leaving all or most of the family protection trust to their spouses, for example. With a family protection trust you can literally and legally create a dynasty intended to benefit your family for generations.
Len & Rosie
Dear Len & Rosie,
Both my husband and my son have recently died, leaving my daughter and me. My will was drawn up in 1989 so that my children would share equally if anything is left to share.
My daughter has no children, but my son had two. Will my son's children split his share of my estate or must I contact a lawyer and make a new will? Or should I get a trust instead? I want to make sure that my grandchildren get their fair share.
The answer to your question depends on what exactly your will says. The dispositive provisions of your will, that is, the part of your will that says who gets what when you die, probably says that your children will split your estate into shares by "right of survivorship" or by "right of representation." These are important phrases that you should understand. "Right of survivorship" means that each gift will lapse if the person you are giving it to dies before you do. If your son inherits through your 1989 will by right of survivorship, then your daughter will inherit everything when you die and your son's children will get nothing. "Right of representation," which is sometimes also called "per stirpes," is what you want. If your gift to your son is by right of representation, then his gift will not lapse because he died before you. Rather, it will pass on to his issue, which means his two sons will share one-half of your estate. Your son's widow will get nothing. If your will does not specify that your son's gift is either by right of representation or by right of survivorship, then you ought to have an estate planning attorney look at your will. California has an anti-lapse statute that could pass your son's half of your estate to his children, but it will not apply if the precise wording of your will shows an intention that your son must survive you to receive a portion of your estate.
This can get a little bit complicated, so you should rely on the professional opinion of an attorney, instead of trying to figure it out for yourself. You do not want to make mistakes with your will, because you cannot fix them after you are dead.
It will not cost you a lot of money. If you need a new will, most attorneys will not charge you more than a few hundred dollars for one. Why? The attorney who writes your will is going to have the inside track in on earning probate fees from your estate after your death. Finally, if you own a house, or if your estate is worth more than a couple of hundred thousand dollars, then you ought to consider a revocable trust. A trust will cost you more money than a will, but it will save your family time and money after you pass away. Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at 996-4505, or on the Internet at lentillem.com. Len also answers legal questions each weekday on The Len Tillem Show, a podcast available via iTunes, Facebook, www.spreaker.com/user/lentillem and lentillem.com.