This week’s topic considers the question of how to plan your estate most effectively when you are primarily concerned with the welfare of your adult children. Sometimes there is doubt about an adult child’s ability to handle an inheritance responsibly.
Other times, parents may be too confident in their adult children and engage in unwise planning efforts by involving them prematurely. This article will address these concerns and the do’s and don’ts of planning for adult children.
Florida Estate Planning Precautions With Adult Children
Why Not to Jointly Title Assets With Adult Children
Jointly titling assets with adult children seems like a simple and viable strategy and yet this approach has some very serious drawbacks.
When beginning to talk estate planning with couples, sometimes the planning strategy of choice seems to be retitling certain assets directly in the adult child’s name. In these circumstances, I always pose a simple fateful question which to paraphrase goes something like, “is your son/daughter more or less responsible than you?” This question elicits a few predictable responses which range (on one end of the spectrum) from a glowing report of how accomplished and bright little Johnny is, to (the other end of the spectrum) that can look like a a long pause or deep sigh…enough said.
So the risks that present themselves when jointly titling assets with your children and the best alternative is the epic discussion of choice for this week’s article…
The seriousness of placing assets in the kids names is due to the risks inherent in being young and the many life changes that can occur. Unfortunately, life changes generate risk which can jeopardize your hard earned assets. What kinds of life changes am I referring to? Well, the biggies are divorce, bankruptcy, IRS problems, problems with the law, and injuries and illness following at a distance. I will address these life events one at a time in order to paint a proper picture.
The Risk of Divorce
Divorce is at the top of my list because it can financially devastate the participants and splits the assets in half essentially. Spouses may be deemed one of two “super creditors” along with the IRS discussed below. So if divorce happens, all the adult child’s assets are in jeopardy. If a well meaning parent placed assets in the adult child’s name, it could very well be subject to the divorce and this cannot be undone.
The Risk of Bankruptcy
Similar to divorce, a bankruptcy places all the adult child’s assets at risk only this time it is the bankruptcy trustee who wants to take a swipe at them instead of the spouse. The same situation applies in that the parent cannot simply take the assets back.
The Risk of IRS Problems
Adult children, especially business people, can face tax problems in their lifetime and when this happens the sweeping powers of the IRS spring into action and can result in tax liens on all assets.
The Risk of Legal Problems
This could be anything; however, issues such as accidents due to DUIs are the worst and civil and criminal judgments could result in judgement liens for substantial amounts of money which would again jeopardize all assets in the adult child’s name.
Health Concerns and Injuries
Younger people may be subject to injuries due to an active lifestyle or may experience medical emergencies such as heart attacks and medical bills can pose substantial risk to the estate assets.
You may be asking whether all of this matters because the elderly parents would also have risks? This is a valid concern, especially where the parents may be facing the need to plan for long term medical assistance and/or medicaid planning. Still, the fact is that most of the risks mentioned above have been weeded out of the parents lives by the time the estate planning discussion ensued AND there are other ways to plan for long term medical care and protect the adult children by using Revocable and Irrevocable Trusts.
Why does the Revocable Trust solve this problem?
Simply put, the Revocable Living Trust allows the parents to retitle the assets in the name of the Trust rather than placing the adult child’s name on them. The adult child or children may still be beneficiaries of the Trust and yet there is zero risk that the assets will be exposes to any of the adult child’s creditors or super creditors for that matter. There are also asset protection advantages for your children when using Trusts which initialize upon you death so even when the adult child is a “vested beneficiary” there are still advantages to not having the assets titled in his/her name.
Irrevocable Trusts may be used for this same purpose with the only difference being that an Irrevocable Trust involves a transfer out of the parents’ estate and this transfer is not revocable. In this kind of planning, the adult child would be a beneficiary of the Irrevocable Trust immediately and the Trust would not be subject to creditor attachment. So there are different pros and cons associated with using an Irrevocable vs. a Revocable Trust and this is a great idea for a future article.
Why Not to Designate Adult Children Directly As Beneficiaries of IRAs
Given the kinds of risks that young adults face and all of the reasons discussed above that joint titling of assets can be a poor estate planning choice, the alternative to joint titling is to use proper revocable trust planning strategies. One reason that a revocable trust is so effective is the asset protection that it can offer your beneficiaries upon your death if properly drafted. For this same reason, it is recommended to designate a revocable living trust in Florida as the IRA beneficiary rather than the individual adult children.
Why IRA Beneficiary Trusts Are Beneficial For Adult Children.
What about IRAs that pass to your beneficiaries? If your children are designated directly as the beneficiary, then there is no asset protection for the IRA. You read that right…even though an IRA is asset protected for you, if it passes directly to your beneficiary there is no asset protection.
I do not often cite court cases; however, this part of our discussion was inspired by the United States Supreme Court decision of Clark v. Rameker, reached in June of 2014, when the Court decided that an adult child who inherited an IRA from her mother and then filed bankruptcy 9 months later could not shield it from creditors.
Beneficiary IRAs for Adult Children and the Mini-Boom In Estate Planning…
When the Rameker decision occurred, a “mini boom” in the estate planning world was predicted because the account would likely have been shielded if she had designated a properly drafted Trust as beneficiary. Beneficiary Trusts are typically shielded from creditors due to the “spendthrift language” in the Trust. The important point here is that the revocable trust includes very specific language to allow a “conduit trust” or “accumulation trust” depending on the estate planning objectives.
So one more time, the Trust must be properly drafted AND the beneficiary designations should be professionally reviewed by a competent estate planning attorney in order to assure that the Trust includes IRS compliance to allow the proper management of the IRA proceeds.
To point out another planning issue, a spouse will typically have less options if the IRA is left to the Trust; however, this can be avoided by designating a spouse as primary and the Trust as secondary or contingent beneficiary.
The “take away” this week is that a Florida revocable living trust is the recommended alternative to jointly titling assets with adult children OR making your adult children the direct beneficiaries of IRAs. As always, it is important to have “well drafted” revocable living trust with IRA beneficiary provisions in order to provide the necessary asset protection and in order to implement a number of tools to protect your beneficiaries from life’s uncertainties. If applicable, you can even protect your adult children from themselves through special provisions like “special needs” or “non-drug use”.
Steven J. Gibbs, Esq.
This is an updated edition of 2 original blog posts published March 2015.