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If You Really Love Me, Don’t Leave Me Anything!

March 16, 2023 by Ronald "Chip" Morrison

This sounds like an odd statement, but it may be very accurate.  Leaving assets directly to children or other beneficiaries may cause them problems which could be easily avoided or reduced by leaving them the assets in trust rather than outright.  Even if the child is a very capable adult, it is often better to leave the assets in trust.  The child can receive the assets in trust and could be trustee of that trust.  As trustee, the child could invest the assets as desired, could purchase a home with trust assets and live in it, and could even start a small business.  All of this can be done while leaving the assets in the trust.  Further, as trustee, the child could make distributions needed for his or her health, education, maintenance and support, or that of his or her own children.  Finally, the child can be given a power to determine who should get any remaining assets at his or her own death. 

Clearly, the child/trustee can be given a great deal of flexibility while still keeping the assets in trust.  The child is not giving up much, but what is he or she gaining by having the assets left in trust?

Estate Tax

If the trust is drafted properly, the assets in the trust and any growth on those assets will not be included in the child’s estate at his or her death.  In other words, the assets will not be subject to estate tax at that point.

Divorce

The assets in the trust and the earnings on those assets will not be considered marital property or community property and will not be subject to division by a court in a divorce proceeding.

Maintenance and Support

In some states, assets left to a child in trust may not be subject to claims for maintenance or child support.

Lawsuits and Bankruptcy

The assets in the trust may not be subject to attachment by the creditors of the child.  If the child is a physician and a jury awards millions of dollars in a malpractice claim, the assets in his or her trust may be shielded from that judgment creditor.  Note that the degree of creditor protection will vary from state to state and may be enhanced by having an independent trustee or making other changes.

Income Tax

Assets in the trust may generate taxable income, just as they would if they were left outright to the child.  Income earned by the assets in the trust will be taxed to the trust unless there are distributions to the child that carry out the income tax attributes.  This gives the child/trustee flexibility to determine if taxation to the trust or to the child would be more advantageous.  For example, let’s say the child had $95,000 of income and wants to convert a traditional IRA to a Roth IRA.  The child cannot do so if his or her taxable income is over $100,000.  If the property to be left to the child earns $10,000 a year, it would disqualify the Roth IRA conversion unless it is left in trust.  If left in trust, the income can be taxed to the trust and not appear on the individual return.

Of course, if the child is a minor or does not have financial acumen, a trust can be a good way to give them the benefit of the assets while giving decision-making authority to someone more able.  But, in order to gain the tax and asset protection advantages of a trust, it is often better to leave assets in trust even for bright, responsible beneficiaries.

A qualified estate planning attorney can help you determine the best way pass on your wealth to ensure you protect your children and not lose hard-earned assets to your children’s creditors, ex-spouses, or the IRS.

Mr. Morrison is a board-certified estate planning attorney with experience in both simple and complex estate matters. He can prepare an estate plan for you that achieves your goals of passing your assets to whom you wish. The planning can even help minimize estate taxes. The firm has helped thousands of clients meet their estate planning goals and pass on lasting legacies to their loved ones. To learn more about how you can achieve your estate planning goals, please call (504) 831-2348 or visit our website at www.morrisonlawplc.com.

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Ronald
Ronald "Chip" Morrison
Ronald “Chip” Morrison, Jr. is a Board Certified Estate Planning Law Specialist as certified by the Louisiana Board of Legal Specialization. He is admitted to practice before all State courts in Louisiana. He is also admitted to practice before the United States District Court for the Eastern and Middle District of Louisiana.
Ronald
Latest posts by Ronald "Chip" Morrison (see all)
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About Ronald "Chip" Morrison

Ronald “Chip” Morrison, Jr. is a Board Certified Estate Planning Law Specialist as certified by the Louisiana Board of Legal Specialization. He is admitted to practice before all State courts in Louisiana. He is also admitted to practice before the United States District Court for the Eastern and Middle District of Louisiana.

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