Asset Protection – Page 2

A comprehensive Life & Legacy Plan is about creating a strategy that lets you enjoy your life to the fullest while protecting your loved ones’ future when you can no longer be there. It might seem like life insurance is an easy way to help secure your loved ones’ future – and it is – but your policy must be set up in the right way to have the best possible impact on your family.

The way you set up your beneficiary designations on your insurance policy can significantly impact its effectiveness, how it’s used, and who controls it after you die. In this blog, we’ll explore how to name beneficiaries to ensure your loved ones have the funds they need to thrive when something happens to you.

DO NOT Name a Minor As The Beneficiary of Your Life Insurance Policy

Naming your child or grandchild as a direct (or even backup) beneficiary of your life insurance policy may seem like a natural choice.

However, if a minor child is the beneficiary of a life insurance policy, it guarantees a court process called “guardianship” or “conservatorship” must occur to name a legal guardian or conservator to manage the assets for your minor beneficiary until they turn 18. Then, at 18, your minor child receives everything left in the account–outright and unprotected–with no oversight or guidance. This is the worst possible outcome for everyone involved.

You might think the answer is to name a trusted family member or friend as the beneficiary of your life insurance, hoping they’ll use the funds for your kids, but that may not produce the desired outcome either.

If you name another adult as the beneficiary for a life insurance policy intended for your kids, your kids will have no legal right to the money. The adult you named as beneficiary can use the money however they want and don’t have to use it for your kids at all!

So what’s the solution? Keep reading until the end to find out what to do instead.

DO NOT Name Adult Beneficiaries Directly

Direct payouts to adult beneficiaries may seem straightforward, but can have unintended consequences. Life circumstances change, and the lump sum received from a life insurance policy might be at risk if not managed properly. By avoiding direct payouts, you can ensure that the financial security provided by the insurance is preserved for the long term.

One key concern is the potential for beneficiaries to hastily misuse or exhaust the funds. A sudden windfall might lead to imprudent spending, leaving your loved ones without the financial support you intended. Additionally, if your beneficiaries are not financially savvy, they may struggle to manage a lump sum effectively, meaning the policy might lose money over time.

Even if an adult beneficiary is financially responsible and savvy – or knows enough to speak to a financial advisor – life events can put the funds at risk. Because the life insurance proceeds now belong entirely to your beneficiaries in this case, the proceeds of the policy are now completely vulnerable to any future divorces or lawsuits that your beneficiary may go through in the future.

That means that if your beneficiary is divorced, sued, or accumulates debt, all the money they received from your insurance policy could be lost.

Plan For Your Life Insurance The Right Way: Use a Trust

A Trust is an agreement you make with a person or an institution you choose. This person is called your Trustee, and their job is to manage the assets you put into or leave to your Trust, according to the rules you create.

Instead of naming minors or adult loved ones as the direct beneficiaries of your life insurance, name your Trust as the beneficiary of your policy instead. By doing this, your loved ones will still receive the funds you intend for them while the decisions you made in the Trust maintain control over how the funds are managed and distributed. This ensures that your wishes for your assets and your loved ones are carried out even after you’re gone.

How does it work?

A well-drafted Trust allows you to specify conditions for distributing the Trust funds, ensuring that the funds are used for intended purposes such as your beneficiaries’ education, homeownership, or other specific needs. Distributions from the Trust can also depend on the ages and circumstances of each beneficiary. This level of control can prevent the misuse of funds and promote responsible financial behavior for everyone involved. Plus, assets held in a Trust bypass the probate process, ensuring a more efficient and timely distribution of funds to your beneficiaries. This can be crucial in providing immediate financial support to your loved ones when they need it the most.

And while you can choose to have your Trustee distribute life insurance proceeds directly out to your beneficiaries outright, at specific ages and stages, you may want to provide even more protection for your beneficiaries. One of the considerations we’ll help you make is whether to retain the assets in trust, giving your beneficiaries control over the Trust assets, but in a manner that keeps the inherited life insurance protected from lawsuits, future divorces, and creditors.

Let Us Set Up Your Entire Plan In The Best Way Possible

Setting up your life insurance policy with the right beneficiaries involves careful consideration of your unique family dynamics, financial goals, and long-term objectives while being proactive to avoid future issues. By doing so, you maximize the benefits of your life insurance to provide a lasting legacy of financial security and support for your loved ones.

But planning for your life insurance is only one step in creating a plan for everything you own and everyone you love today and in the future. My mission is to guide you to create a comprehensive estate plan that ensures your wishes are fulfilled and your family’s future is protected no matter what the future holds.

Schedule a complimentary call with my office to learn more. Contact us today to get started.

This article is a service of August Law, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Life & Legacy Planning™ Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

As a parent, you’re likely hoping to leave your children an inheritance. In fact, doing so may be one of the primary factors motivating your life’s work. But without taking the proper precautions, the wealth you pass on is at serious risk of being accidentally lost or squandered due to common life events, such as divorce, serious debt, devastating illness, and unfortunate accidents.

Creating a will or a revocable living trust offers some protection for your kid’s inheritance and you can set parameters for distribution at specific ages and stages. In our planning process, we offer parents the option of creating a Lifetime Asset Protection Trust for their children’s inheritance. These unique trusts safeguard your kids’ inheritance from being lost to common life events, such as divorce, serious illness, lawsuits, or even bankruptcy.

These trusts offer kids the best of both worlds: 1) airtight asset protection and 2) the ability to use and control their inheritance. You can even provide your heirs with a unique educational opportunity in which they gain valuable experience managing and growing their inheritance.

Not Only For The Super Rich

Contrary to what you might think, Lifetime Asset Protection Trusts are not just for those with massive wealth. In fact, these trusts are even more useful if you’re leaving a relatively modest inheritance because they can be used to educate your children about how to grow your family wealth, instead of quickly blowing through it.

Not All Trusts Are Created Equal

When it comes to leaving an inheritance, most lawyers will advise you to place the money in a revocable living trust, which is the right thing to do. However, most lawyers would have you distribute the trust assets outright to your loved ones at specific ages, such as one-third at 25, half of the balance at 35, and the rest at 40. Check your own trust to see if it does this or something similar.

But giving outright ownership of the trust assets in this way puts everything you’ve worked so hard to leave behind at risk. While a living trust may protect your loved ones’ inheritance as long as the assets are held by the trust, once the assets are disbursed to the beneficiary, they can be lost to future creditors, a catastrophic accident or illness, divorce, bankruptcy—or even a major lawsuit.

Rather than risking their inheritance by leaving it outright to your children at certain ages or following certain life events, such as graduating college, you can gift your assets to your children at the time of your death using a Lifetime Asset Protection Trust. When you gift the inheritance to your kids via a Lifetime Asset Protection Trust, the Trustee of the trust owns the assets, not your children. A Lifetime Asset Protection Trust can be built into a revocable living trust, which becomes irrevocable at the time of your death and holds your loved one’s inheritance in continued protective trust for their lifetime.

A Trustee of your choice holds the trust assets upon your death for the benefit of your child or children. Because a Lifetime Asset Protection Trust is discretionary, the Trustee has the power to distribute the assets at their own discretion, instead of being required to release them in a rigid structure. This discretionary power enables the Trustee to control when and how your kids can access their inheritance, so they’re not only protected from outside threats like ex-spouses and creditors, but from their own poor judgment as well.

A Lifetime Of Guidance & Support

Given that distributions from a Lifetime Asset Protection Trust are 100% up to the Trustee, you may be concerned about the Trustee’s ability to know when to make distributions to your child and when to withhold them. Granting such power is vital for asset protection, but it also puts a lot of pressure on the Trustee, and you probably don’t want your named Trustee making these decisions in a vacuum.

To address this issue, you can write up guidelines to the Trustee, providing the Trustee with direction about how you’d like the trust assets to be used for your beneficiaries. This ensures the Trustee is aware of your values and wishes when making distributions, rather than simply guessing what you would’ve wanted, which often leads to problems down the road.

In fact, many of our clients add guidelines describing how they’d choose to make distributions in up to 10 different scenarios. These scenarios might involve the purchase of a home, a wedding, the start of a business, and/or travel. Some clients choose to provide guidelines around how they would make investment decisions, as well. This is something we can support you with if you decide to use a Lifetime Asset Protection Trust.

An Educational Opportunity

Beyond these benefits, a Lifetime Asset Protection Trust can also be set up to give your child hands-on experience managing financial matters, like investing, running a business, and charitable giving. And he or she will learn how to do these things with support from the Trustee you’ve chosen to guide them.

This is accomplished by adding provisions to the trust that allow your child to become a Co-Trustee at a predetermined age. Serving alongside the original Trustee, your child will have the opportunity to invest and manage the trust assets under the supervision and tutelage of a trusted mentor.

You can even allow your child to become Sole Trustee later in life, once he or she has gained enough experience and is ready to take full control. As Sole Trustee, your child would be able to resign and replace themselves with an independent trustee, if necessary, for continued asset protection.

Regardless of whether or not your child becomes Co-Trustee or Sole Trustee, a Lifetime Asset Protection Trust gives you the opportunity to turn your child’s inheritance into a valuable teaching tool. Do you want to give your child the ability to leave trust assets to a surviving spouse or a charity upon their death? Or would you prefer that the assets are only distributed to his or her biological or adopted children? You might even want your child to create their own Lifetime Asset Protection Trust for their heirs.

Find Out If A Lifetime Asset Protection Trust Is Right For Your Family

Of course, Lifetime Asset Protection Trusts aren’t for everyone. If your kids are going to spend the vast majority of their inheritance on everyday expenses and consumables, they probably don’t make much sense. But if you want the assets you are leaving behind to be invested and grown over the long term, even through their own business or investments, a Lifetime Asset Protection Trust can be immensely valuable.

When you meet with us, we will work with you to look at your family circumstances and your assets to decide together if a Lifetime Asset Protection Trust is the right option for your loved ones. In the end, it’s not about how much you’re leaving your heirs that matters. It’s about ensuring that what you do pass on is there when it’s needed most and put to the best use possible. Schedule a complimentary call today to learn more.

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