Frequently initial meetings with clients begin with the client telling us that they have adult children and they want their estate plan to provide for the inheritance to pass outright to their children. They indicate their confidence in their children; say that if they haven’t taught their children adequately by now, they aren’t going to worry about it. Without challenging those assertions, how should we mesh that thinking with the statistical probability that fifty percent of all marriages end in divorce or the existence of roughly 84,000 lawyers in Texas? Here are three things we encourage our clients to consider:
1. Community property vs. separate property. Inheritances begin as separate property in the hands of a surviving child, but income from that property is community property and the property itself can be commingled over time and become community property. Cash investments, such as insurance proceeds, are easier still to commingle and more difficult to protect.
2. Exposure to creditors. Even if property is kept as separate property, it does not protect the assets against exposure from creditors. Liabilities come in all shapes and sizes, but include credit card debts, home mortgages, business debts, divorces and lawsuits of all types. One axiom in our society seems constant – if you have money, someone else thinks they deserve it more.
3. Little additional cost. A separate trust for each child might cost an additional $200 in an estate plan but could provide for the child to be their own trustee either initially or as they gain experience or maturity. There would be an additional cost to have an income tax return for the trust prepared annually, but the entire amount of the principal might be saved by doing so.
As a result, we almost always recommend the use of children’s trusts to receive inheritances and substantial gifts. If you have any questions about your estate plan, give us a call.