“Great Fortunes Lost” was an article in Fortune magazine years ago. It described how various individuals, usually heirs, lost or squandered very large fortunes.
Some of the individuals lost more than money. They lost their health or wasted their lives because of the effects wealth had on them.
It’s nice to leave enough to make the children and grandchildren comfortable.
Yet, you don’t want to leave them more money than they can responsibly handle, or make them idle or wasteful.
You also probably don’t want to risk having your money end up with ex-spouses or creditors for example.
Fortunately, you can leave enough to make your children and grandchildren comfortable and leave it in ways that avoid most of these problems.
You generally want to leave money and property in a trust or trusts, with a reliable friend, family member, or professional as trustee or co-trustees.
Then include some key provisions in the trust. Here are the provisions to consider when setting up a trust for your beneficiaries.
This is the standard for all trusts and generally provides that creditors of the beneficiary cannot force payouts from the trust or be paid directly from the trust.
That means that even if the beneficiary is bankrupt, the creditors still cannot invade the trust.
The creditors can lay claim to any money or property paid to the beneficiary from the trust.
In addition, some states don’t allow the spendthrift clause while others limit it to the first $50,000 or so of the trust.
So, while you should have the spendthrift clause when it is available in your state, it is not the only trust control you need.
Under this clause, the trustee has discretion to pay or not pay income and principal to the beneficiary, and can decide how much to pay.
This provision can work when the trustee knows your wishes well and you have left written guidelines for the trustee to follow.
In these circumstances, you might not need any other protection or incentive clause in the trust.
You can leave distributions to the trustee’s discretion.
The discretionary clause can leave the trustee and beneficiary as adversaries, and you can’t anticipate all possible situations ahead of time and give the trustee guidance on each possibility.
So it is a clause to be used carefully.
A corporate trustee who is not familiar with your family also might not be able or willing to use the discretion effectively.
It’s likely you would need an individual who knows the family to serve as trustee.
Milestone or Stepping Stone Trust:
This provision avoids giving money to an heir before he or she can handle it.
Instead of leaving money outright, you leave it in a trust that will pay out only the income, or will pay only for specified expenses such as education and medical care for a period of time.
The beneficiary receives principal distributions when certain milestones are met.
The milestones can be reaching a certain age, graduating from college, being employed for a certain number of years, or virtually any milestone you want to set.
The entire trust might be distributed upon reaching one milestone or in stages as different milestones are reached.
The stepping stone trust allows the beneficiary to learn how to handle the money and encourages the beneficiary to be useful and productive.
For example, a trust could provide that one third of the principal is paid when the beneficiary reaches age 25, one third at age 30, and the rest at age 35.
Or you could have smaller percentages or specific dollar amounts paid in the early years and large percentage or amounts for the later dates.
In next week’s issue of Retirement Watch Weekly, I’ll share more provisions for setting up trusts for your heirs.
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