What will life be like for the child or beneficiary to whom you are planning to leave gifts through your Will or Trust? It is sometimes an uneasy discussion. Your Attorney is being realistic, however, not morbid.
Costs Of Medical Care For A Child Or Beneficiary Is An Important Topic
The CDC data from the last several years points to more than half of young adults ages 18 to 34 already having at least one chronic condition. By ages 45 to 54, over half of adults manage multiple chronic conditions, such as obesity, heart issues, arthritis and others. In many situations, these can be managed; but these can often result in the need for substantial care and treatment. The science is catching up. But the cost of medicines, treatments, inpatient care and caregivers is substantial, as we often see with family and friends.
Planning for your own eligibility for Medicaid or other long-term payment sources is essential to protect your life savings and assets from being exhausted by the high costs of long-term care. Planning for the potential long-term needs of your children or other beneficiaries is equally important.
Medicaid and other programs have strict income and asset requirements, and after you are gone the gifts that you leave to a child or beneficiary may affect their eligibility and may require that they use up the inheritance before qualifying. Waiting until after the gift is made can be a poor planning decision.
Debt Issues Facing A Child Or Other Beneficiary Are Equally Important
Often overlooked in the Estate Planning discussion is the potential that a child or other beneficiary may be facing a serious debt issue at the time that they inherit property or assets from you.
Consider that creating a Transfer On Death Instrument (TODI) or identifying the child as a beneficiary for a life insurance policy, an account or in a land trust creates an immediate right and interest in that child or other beneficiary at the time you pass.
If the beneficiary is then dealing with a judgment or potential claim against them (for example, an uninsured claim, or a debt arising from their spending habits or the loss of a job, or other circumstances, whether or not requiring bankruptcy assistance), the judgment creditor or bankruptcy trustee has a direct line to the inheritance. This is obviously NOT a part of your plan.
A frequent misconception about inheriting retirement accounts often avoids discussion, as well. Know that being the beneficiary of an IRA or 401k is NOT going to protect those assets, much to the disappointment of clients who have saved their entire lives to leave a child or other beneficiary the balance of their retirement savings. Since 2014 federal law and most state laws do not protect an inherited IRA or 401k, whether a traditional or Roth product, and whether inherited by a child or other beneficiary, because the proceeds in that person’s hands are not considered ‘retirement funds’.
Today, your retirement accounts may be the largest source of your funds available for the objects of your bounty, But they are rarely part of the discussion when planning for or updating your Estate Planning.
For non-retirement assets, the situation is the same. The tools used to bypass probate court administration and expense do not protect the assets from the reach of a beneficiary’s creditors.
Some clients boast about relying on jointly owned property with right of survivorship, so that when they pass away their beneficiary automatically receives full ownership. Some clients commonly rely on payable-on-death (POD) accounts and beneficiary designations for bank or investment accounts, where named beneficiaries directly receive the property or funds when they pass. Life insurance proceeds are also typically structured so that they are paid directly to the designated beneficiary.
Literature available to the public and social media praise efficiency and probate avoidance as the stated goal. Yet forgetting that these tools are not a shield from the beneficiary’s creditors is forgetting to address an important consideration.
Planning To Fail Or Failing To Plan?
Leaving the consideration of these important topics to your beneficiaries is not a plan. Reducing family stress with reasonable planning to relieve family members of the burden of managing these issues during a critical time is an important consideration.
The thought that a child or beneficiary may face significant life issues at the time they inherit your property and assets is unpleasant. But it is very real, and very important to consider. Asset Protection is a valuable topic both for yourself and for your children and other beneficiaries.
Start the conversation with your Estate Planning Attorney or, if you don’t have one or if you want a second opinion, reach out to Marc Sherman or Maureen Meersman for that discussion. https://mshermanlaw.com/contact/
