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Elderlaw: 08/15/2011

Protection from self



Dear Len & Rosie,

My parents are fairly wealthy – they are worth over five million dollars. Is there any way I can put a barrier between me and my inheritance? I tend to be irresponsible with money. I played the lottery a lot and I used to make high risk investments. Some investments have paid off but more have lost money. If I suddenly came into a million dollars, I don’t know what would happen. I don’t really trust myself. How do I tell my parents something like this without outright saying I am a bad person?

Sam



Dear Sam,

Dirty Harry once famously said, “A man’s got to know his limitations.” The first step towards solving any problem is recognizing what the problem is. You are certainly not a “bad” person because you lack prudent investment skills. There are several approaches you can take to preserve your inheritance once you get it.

Given that you’re a lousy investor, get help. Don’t listen to the little voice in your head that says to hold onto an investment that isn’t doing well. Making investment decisions based on hunches alone isn’t investing. It’s gambling. Instead, hire a financial advisor with a good track record and rely on that person’s advice. When looking for a financial advisor, consider a fee-for-service advisor that doesn’t get a commission every time you buy or sell stock. There are some financial advisors out there who make money “churning” investment portfolios to earn more in commissions than they ought to.

You should also talk to your parents. Instead of leaving you an inheritance outright, they could create a dynasty trust for your benefit. The idea behind a dynasty trust is that there are three fundamental problems with inheriting wealth. You can get sued and lose your inheritance. You can get divorced and see your wife drive off with the tennis instructor in a Lexus your parents paid for. And, if you’re lucky (or have a skilled financial advisor) you could do very well with your investments, so well in fact that your children will have to pay federal estate tax on your death.

A dynasty trust is, at its heart, a “spendthrift” trust that is not subject to the claims of the beneficiary’s creditors (except for child support creditors and the IRS). It’s also a convenient means of protecting your separate property inheritance in the event of a divorce. And your inheritance, and all of its appreciation, will be exempt, for the most part, from federal estate tax on your death.

With a dynasty trust, your parents can create a framework to manage your inheritance. The trust could require you to hire a financial advisor. If you are extremely bad with money, they could go so far as to make someone else your trustee, perhaps a brother or sister. Or maybe you and another person can be co-trustees, and you could be restricted from spending over a certain amount without your co-trustee’s agreement. Your parents can also write restrictions in the trust as to how assets are to be invested. They can allow you to leave the trust upon your death to anyone you want, or they can require you to leave it to family members alone.

It’s important to remember that proper estate planning isn’t done by filling in the blanks on a one-size-fits-all boilerplate document. It’s about analyzing an estate and developing a multi-generational estate plan that will help your parents and their children achieve their goals.

Len & Rosie

Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-1 p.m. and Sundays, 4-7 p.m. on KGO Radio 810 AM.
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