One of the important elements of a thoughtfully designed estate plan is not “how much” is left to a particular heir – but rather “how” the inheritance is left to the heir. With no estate plan implemented, there is only one outcome. The heirs (determined by state law) will receive the inheritance outright. For many estate plans, outright distributions to heirs are often specified, either immediately upon death or when younger beneficiaries reach certain ages (age 25, etc.).
While providing for outright transfers may be appropriate in some circumstances – outright transfers leave the assets exposed to heir’s “uncertainties of life.” In many situations, an heir would be much better off receiving the inheritance in the form of a trust share – perhaps controlled and directed by the beneficiary – rather than receiving the inheritance outright. A well designed estate plan will assure that assets that are left to an heir will be protected from the heir’s potential lifetime creditors, including a spouse in a failed marriage. Outright transfers do not have this protection.
Here is a “real life” example. Assume “Parent” (unmarried) has a $1,000,000 estate that is to be left to his only child (“Child”). If Parent had no estate plan, at Parent’s death all assets will pass to Child outright (albeit through the probate process). Assume that Child was “underwater” on a real estate mortgage (owed more than the property than the property is worth) and was involved in a foreclosure proceeding. At the moment of Parent’s death, Child is entitled to the $1,000,000 and the $1,000,000 is instantly exposed to Child’s creditors, in this case, the foreclosing lender. If the foreclosure sale of the property does not fully cover the liability on the mortgage note, Child could be liable for what is referred to as a “deficiency judgment” which the lender could collect against the inherited assets. If instead Parent had left Child’s inheritance in a trust via a properly designed estate plan, Child’s creditors would be unable to reach the $1,000,000! Note that this is the case even if Child has substantial control over the Child’s trust.
Imagine the implications in other real life situations that could confront your heirs over their lifetimes – failed marriages, business creditors, automobile accident liability, etc. Which way do you think your heirs would want to receive their inheritance – outright (not protected) or in a controlled trust share (protected)? This is just one of many reasons why thoughtful estate planning matters! Contact our office today at 772.489.4901 to discuss your estate planning needs.