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.

Many of you may have, or might one day, awaken to a startling revelation: one of your parents is not exhibiting the responsible fiscal oversight of his or her finances. For as long as you have known your parent, there was scarcely a check you could inquire about that they did not only know why it was written, but could produce the hard copy receipt in nanoseconds. Now, the parent is covering up their indiscretions or is openly confused. You have grown into being one of his or her adult children yet, you could not have adequately foreseen this day, no matter how many books you have read.

Even more challenging is the common conclusion that your parent is not fully disabled or incapacitated. That would make things easier. The fact is your parent has just mentally slowed down. Black and white has turned to grey and there is no clear line of demarcation between the point where the parent can pay his or her own bills or handle money and the point at which the parent is no longer able to manage finances responsibly.

Children often grow to feel concerned and responsible. What if there is insufficient money? What if it is all lost or given away and none is left to take care of the parent? The burden might fall upon the children.

Yet, at the same time, respect for the parent demands gentleness and patience. The parent may resist any insinuation that they are slowing down. Independence has been a watchword of the parent for their entire lives.

We have a few ideas on how to address this, and more are being generated as we counsel with children and parents in these sensitive situations. Below are a few brief options you may want to consider if you find yourself acting on behalf of one or both of your parents:

1. A convenience account where a child can sign onto the parent’s account, volunteering to help pay bills.

2. A revocable trust in which the parent and a child can be co-trustees. This can allow the parent to continue to be “in control”, pre-plan for subsequent greater disability, allow the child to sign checks at any time, and ultimately avoid probate at the parent’s passing.

3. A revocable trust with a third-party as a trustee. The third-party can be an institution or a trusted advisor. While the parent may still control their own checking account, the trustee can make sure that bills can be attended to normally.

4. An irrevocable trust with the parent, children, and/or a third party as co-trustees. The main difference between this trust and the revocable trust mentioned above is the ability of the parent to alter the trust in the future. If a main concern is the lack of responsibility coupled with the possible influence of another person (such as, perhaps a second spouse), this structure allows some limitation on the ability of the parent to make swift and far reaching changes to the trust.

Balancing the need for action and the desire to honor parents and show them the respect they deserve is a challenge. Please let us know if we can help.

At Dismuke, Waters & Sweet, we view estate planning as much more than just trying to avoid taxes. Yet with all the chaos in the last couple of years on the tax side of estate planning, many vital, non-tax aspects of planning tend to get overlooked or even ignored. For instance, how does one minimize exposure in accidental occurrences such as automobile accidents? Or, how do we keep our assets beyond the reach of judgment creditors, ex-spouses, or the unscrupulous among us? Any well-crafted estate plan should employ strategies that address these important non-tax issues. The specific strategies we employ depend largely on the particular client and the nature of his or her assets. A few of these strategies may include the following:
• Family Limited Partnerships/Limited Liability Companies:
Many states, including Texas, have adopted laws that severely limit a creditor’s right to seize assets properly owned within a family limited partnership or limited liability company. Assets such as after-tax investment accounts and investment real estate are often appropriate for these types of entities.
• Inherited IRAs:
While individual retirement accounts are generally protected from the claims of the IRA owner’s creditors, recent court cases have ruled that an IRA inherited by the owner’s beneficiaries is not protected from the beneficiaries’ creditors. For this reason, it may be wise to designate a “conduit” trust as a beneficiary of the IRA.
• Asset Protection Trusts:
In certain instances, one may transfer assets to a trust for his or her own benefit and have those assets protected from that person’s creditors.
• Life Insurance/Annuities:
Under Texas law, cash or other investments held within a life insurance policy or an annuity is protected from the claims of the owner’s creditors.
• Liability Insurance Policies:
A brief review of general liability protections in homeowners, automobile, malpractice and other policies can be very helpful in crafting an overall protection plan, but they all have limitations and exclusions.
• Umbrella Liability Policies:
A few dollars in premiums for an excess liability umbrella policy might go a long way in minimizing exposure of personal assets.
• Prenuptial, Non-Marital, or Separate Property Agreements:
Advanced planning for situations with spouses and significant others can be critical.

In whatever strategy is employed for protecting assets from predatory creditors, it is critical that it be carefully coordinated with other aspects of planning. Please contact us if we can be of assistance.