Trusts, Surviving Spouses, and Future Generations

Since the mid-20th century, most laymen (and many attorneys who don’t specialize in trusts and estates) have thought of trusts primarily as vehicles for reducing federal and state estate, gift, and (sometimes) income and capital-gains taxes.

So,with the increased federal estate and gift tax exemptions in effect since the 2013 ATRA tax act, quite a few financial writers and “consumer advocates” are advising their readers that trusts are now needed only by folks with $5 million-plus estates. (Or for less-rich unfortunates who live in places (such as Maryland and the District of Columbia) that still have state estate or inheritance taxes.)

Nothing could be further from the truth. In fact, trusts have been around since long before estate, gift, income, and capital-gains taxes became the burden that they are today. Why? In order to keep parents’ and grandparents’ money in their families, and out of the hands of creditors and predators.

Bag O' Cash

The money bag . . .

Think of it this way: when you leave your spouse or your children money or property using a plain old will, it goes directly to them upon your death, via the probate process. Picture several of those big cartoon canvas bags of money, just plopped into their laps. All a trial lawyer, or a foreclosing bank, or grasping son- or daughter-in-law has to do is reach over, untie that string at the top, and start pulling out the loot.  (Well, doing that will usually require a court judgment first, but still.)

Nest Egg

…or the Trust?

Now consider the alternative. With a well-drafted, multigenerational trust, there is no virtual bag of money and property. Instead, there are neat stacks of account statements, titled in the name of your successor trustee or trustees. Your trustees are instructed to pay the money or make the property available to your designated heirs, and no one else, in amounts and at times you specify. (That may be, if you wish, “Any time they wish,” but more often, for younger beneficiaries at least, you’ll want to build in some “immaturity protection.”)

And here’s the good part: the money and property in those trust accounts is out of reach of almost all creditors (and in-laws).

Does this sound like a better way to protect your family? Well, in fact, there’s even more good news! In most cases, if you so specify, your surviving spouse, and your adult children (and even your grandchildren and later generations, upon reaching specified ages), can act as their own trustees or co-trustees after your death.

That puts them in a great situation – they have near-total control and use of their money and property, but with only a few minor exceptions (in Virginia, they are child support and taxes) , they’re not deemed to be its owners if there are ever court judgments levied against them, or if they ever marry improvidently and wind up in divorce court.

Now, does that sound like it’s just too good to be true? Believe me, it’s true. There are a few fine points and caveats we’ll need to discuss during the planning process, but overall, our system of Anglo-American trust law has given us a wonderful tool for keeping the money you leave your spouse and descendants safe from bad guys (and naughty girls).

That’s why I recommend generally that no client of mine leave money or property “outright” to a spouse, child, or other family member. In almost every case, leaving it to him or her in a trust will be the better choice.

And if estate and gift taxes are an issue, trusts can help there, too.