You may have inherited wealth from your parents and built upon their success to create an even greater inheritance for your descendants. Or, you may have started with nothing and worked your way up to wealth through sacrifice and dedication. Either way, your hopes are that your hard-earned wealth will benefit your descendants for many generations. You could worry, then, that your children or grandchildren could lose your wealth through no fault of their own. Luckily, there are a few key steps you can take to help safeguard their legacy for them.
Ways wealth can be diverted
If your child receives their inheritance, but predecease their spouse, problems can arise. For example, if your child dies intestate (meaning without a valid will in place), their surviving spouse will receive all of their assets. If that spouse then re-marries, that wealth could pass to their new spouse and children. It’s possible that little-to-none of your child’s wealth will make it to their own children.
Even if your child does have a will in place, and even if they do specifically bequest their wealth to their children, it’s not guaranteed that their gift will be successful. Hawaii law gives surviving spouses the right to take an elective share of the estate of their spouse. This means that they can take at least a portion of the estate no matter what your child’s will says.
Your child’s wealth is also in danger in the event of divorce. Typically, inheritances are separate property, and thus not subject to division in the event of a divorce. But often, people comingle the funds of their inheritance with marital funds or otherwise do something that makes those funds accessible to their spouse when dividing property during divorce proceedings.
In addition, your wealth could be diluted by your child’s creditors, transfer taxes, unwise investments and so forth. With so many things that can go wrong, what can you do to protect your wealth for future generations?
Trusts as an estate planning tool
One way to protect your wealth from diversion or dilution is to use a trust to keep the wealth out of your children’s immediate possession while still allowing them to receive the benefits of the money. In this way, they can receive monthly or yearly payments from the trust, but since they can’t access the principal, it is protected from their creditors, ex-spouses and so forth.
There are many different types of trusts that you can use, depending upon your goals. For example, you could set up a dynasty trust that never gives your children access to the principal, and simply continues sending them and their descendants payouts until the principal is exhausted. Alternately, you can give them access to the principal after a certain number of years, or under certain conditions – such as having a successful marriage for a decade or more.
Estate planning is complex, and it becomes even more so when you are trying to predict and solve future problems before they occur. Trusts can be a great way of ensuring that your hard-earned wealth stays in the family.