Asset Protection Lawyers Helping Families Throughout California

Most of the time when people hear the word “living trust” they think about avoiding probate. And while that’s definitely an important part of a living trust, it’s not the most important thing a trust can do. When you avoid probate, what you’re basically saying is I don’t want my family to go to court when I die. Meaning, you don’t want your family to ask the judge for permission to distribute your assets to your family.

We’ve reviewed over 10,000 trusts from other Estate Planning Lawyers and we found a common theme in all these trusts. The majority of these trusts distributed the assets outright to the beneficiaries, which means the assets you’ve left behind are taken out of your trust and given directly to your beneficiaries. The assumption at that point is everything went well because the assets didn’t go through probate court. But what most people don’t realize is that the assets that just went to your beneficiary are now subject to your beneficiary’s liabilities. Here are four scenarios where this can be a huge problem.

Scenario #1 – The Son-in-Law Becomes a Beneficiary

Jim and Kathy pass away and leave their estate to their daughter, Jamie, who is happily married to Craig. Jamie uses half of her inheritance to pay off the mortgage on her home, and the balance of the inheritance is placed in a joint account with Craig. Jamie and Craig have been happily married for 25 years so divorce is not something they are worried about. Two years later, Craig has an affair and divorces Jamie. The house they own jointly together (that is now free and clear thanks to Jamie’s inheritance) and the joint investment account (that is now much larger because of Jamie’s inheritance) are divided 50/50 in the divorce proceeding. So, one-half of the inheritance that Jim and Kathy had saved a lifetime for, is now owned by their ex-son-in-law, instead of their daughter Jamie.

Scenario #2 – Bankruptcy Takes the Home

Sara had two sons (Mike and Steve) who inherited her home after she died. Both of her sons were financially stable and had their own homes so they decided to make the home a rental. Several years later, Mike ran into some financial problems (e.g. a pandemic hit and he lost his job) and had to file for bankruptcy. The rental home was subject to bankruptcy proceedings and ended up being sold to satisfy Mike’s debt.

Scenario #3 – Car Accident

Jennifer inherits about $300,000 in stocks from her dad Gary upon his passing. A few years later, Jennifer is in a minor car accident that she did not cause, but is found partially liable. Her insurance only covers a small portion and she is left to pay the rest. The $300,000 in stock that she inherited is subject to the lawsuit.

Scenario #4 – Grandchildren Get Accidentally Disinherited

Nancy creates a trust that upon her death leaves her assets to her son, Brandon. Nancy specifies in the trust that if Brandon dies before her, the assets will go to her grandchildren (Brandon’s children). Several years later Nancy dies. Brandon is alive so he inherits his mom’s assets. One year later, Brandon becomes ill and suddenly passes away. All of the assets he inherited from his mom, Nancy, ended up going to Brandon’s surviving spouse, Kelly. Nancy’s grandchildren didn’t receive anything from Nancy’s assets and were unintentionally disinherited.
If you think these scenarios won’t happen to your family, keep in mind that these scenarios are all based on true stories. In fact, scenarios like these happen all the time.

The common problem in all these scenarios has nothing to do with avoiding probate. It has to do with the outright distribution that the trusts contained. And the majority of the trusts we have reviewed all contained an outright distribution. So, there’s a good chance your trust may contain the same problem.

A Life Plan can protect your children (or any other beneficiary) when they inherit the assets. You can build a protective trust for your beneficiaries right into your trust. So when you pass away, your trust will provide a wall of protection around the assets you leave behind. This means if your beneficiary gets divorced, or is sued, or files for bankruptcy, the assets you’ve left for them are protected. And if your beneficiary passes away after you, the assets will pass down to the next generation, whether that’s grandchildren or nieces and nephews or whomever you choose.

*This article is for information purposes only and is not intended to be construed as legal advice. No attorney-client relationship is created from this article.