A client approached me with an estate problem: her mother passed away in December 2023, and she received an inheritance from her, but my client will receive the inheritance outright and free of trust. My client's concern was that she wanted to make sure her children (and not her spouse’s children) would receive the inherited assets upon her passing.
The solution was to create a separate revocable trust for the inherited assets, which, upon her death, goes to her children. However, this has four negative consequences: the assets will be included in the client’s estate for tax purposes (which would mean that the inherited assets would be subject to estate taxes); the inherited assets will be subject to the spouse’s elective share upon her passing (so the spouse can elect to receive, outright, 1/3rd of the inherited assets); the inherited assets are subject to the client's creditors and lawsuits; and all income is reported on their joint return, creating confusion.
Many of my clients have chosen another solution: the client creates an Irrevocable Trust for the client’s children upon death. The Irrevocable trust holds the inherited assets separate from the child’s other assets. The Irrevocable Trust pays income taxes (unless the child uses the money), the inherited assets are not included in the client's child taxable estate (which can save significant estate taxes), the child’s creditors and lawsuits cannot reach the assets held in the trust, and the child’s spouse has no rights to the assets in a divorce or upon death through an elective share. This solution offers many benefits and can be a source of security.
So, why don't all parents do this? There are usually two reasons: complexity and cost. However, assets held in an irrevocable trust for a child, with the child named as a trustee or co-trustee, are always a better solution than if the assets were held in the child's sole name. This allows for creditor protection, divorce protection, elective share protection, lawsuit protection, estate tax protection, nursing home protection, and separate income tax preparation (that may save income taxes). Most importantly, the child can direct where the assets go at their death, ensuring the assets stay in the parents' bloodline. This comprehensive protection should instill confidence in your estate planning decisions. If you need assistance with setting up trusts that fit your needs, call the attorneys at Altman & Associates at 301-468-3220 or through the website at altmanassociates.net.
