I wish estate-planning lawyers were instead called family lawyers. Whereas family lawyers are mostly concerned with the consequences that result when families dissolve, estate lawyers are mostly concerned with protecting families. In this post, I discuss a few of many ways of protecting your family after you pass away.
Life Insurance Planning
Life insurance can protect your family against the financial risks associated with your death. Without life insurance, your surviving family members may find themselves unable to deal with life’s many expenses.
Not the least among these may be your mortgage.
That said, as important as the mere purchase of life insurance is, planning for your life insurance policy can be equally important. Important planning questions need to be addressed: (1) Who should receive the proceeds? (2) How should the proceeds be spent? (3) At what age(s) should your children receive their share of proceeds? (4) What debts should the proceeds go toward first?
Many individuals with minor children find it desirable to create trusts whose sole purpose is to manage and distribute life insurance proceeds. Merely naming your children as the beneficiaries exposes your family to numerous potential problems: (1) Your children would be entitled to 100% of the proceeds when they turn eighteen, (2) your eighteen-year-old children could waste their share of the proceeds frivolously, and (3) any of your child’s creditors could potentially seize the child’s entire respective share of the proceeds.
This problems are easily avoidable with appropriate life insurance planning.
Planning For Creditors
Protecting your family after you pass away involves serious plans for your dealing with your creditors and your family members’ creditors. Contrary to popular belief, you cannot simply put your assets into trust to shield them from creditors. That said, placing your assets into trust can in some cases protect them from your children’s creditors. Sometimes, it makes sense to shield assets from creditors. As a general matter, a beneficiary’s creditor can reach only those assets that the beneficiary can reach. For this reason, every good trust will include a “spendthrift clause”, which essentially places corpus of trust assets out of the reach of the beneficiary and the collection agency hired to collect on his or her overdue Target card. While the trust assets are out of reach of anyone, they can continue to produce income. However, this income-producing power is lost for the beneficiary of the income-producing assets are seized.
Sometimes, it makes more sense for the trust assets to be paid to certain creditors. For example, if your children are living in a house that is subject to a mortgage, it makes sense for the trust assets to first be spent satisfying the promissory note that is secured by the mortgage.
When trust assets have to be depleted to satisfy the claims of secured creditors, thought needs to be given to which trust assets? Some individuals want their entire estate liquidated, creditors paid, and what remains to go to their surviving family members. Other individuals attach sentimental value or utility to certain properties and want them intact. Your family may be upset when your grand piano that has been in the family for three generations has to be sold to pay a claim.
I like to include a priority list of things to sell first (the least important things) and things to sell last (the most important things) in the event that property has to be sold to satisfy a creditor’s claim. Otherwise, your surviving family members may have to pay attorneys simply to have a judge decide which property to sell.
These are but a few of the many ways of protecting your family after you pass away. To fully discuss your estate plan, you should contact Chris McNeal at 501-372-1300.