Speaker: Maritess Bott
Maritess:
That’s a great question. There’s lots of different ways to give money to your beneficiaries. It could be your children, your nieces, your nephews. It could be adult beneficiaries; it doesn’t have to be minors. And it’s a really—kind of my—my response to that question is—of course—it depends.
Two things that it depends on—well, there’s a lot of factors—but one is certainly, how much it is—how much assets do you really have? I certainly like to kind of get a nice summary of your assets and then also your take on, like, your philosophies about money. I think those are two of the important things—philosophy meaning, are you more of a saver? Do you feel like your kids and your beneficiaries should be able to save it? And if you want to help them with that savings part.
I have beneficiaries or people who come into my office, and maybe they’re already in their 50s. And they tell me, “Oh man, I was given by my grandmother, you know, $100,000 when I was 18 or 21 or 22. I blew through that thing in a couple years, and I wish I would have saved it.” I’ve heard that story many times. It’s not just once or twice. And I tell people that that’s exactly the reason why I prefer to have the money drawn out a little bit further in a person’s life—because it makes them have responsibility, makes them have ambition, you know—making sure that they want to work, not feel like they’re the trust fund baby—but then also give them the ability to have this money in times of emergency or in times of need. There’s certainly a balancing act when it comes to giving money to beneficiaries and to children.
There are several ways. One is time-based. Certainly, it can be like, “Okay, after my death I want it to be given to them—a third right away, maybe five years later give them another third, and then the balance at 30—10 years later,” right? That’s kind of a time-based scenario. What does that mean? It’s sort of like telling your beneficiaries, “I’m going to give you 10 years, so at least you can maybe, if you had some challenges in your life, this money is still going to be available to you in the future.”
The most common one is certainly age-based. When they’re young, you don’t know how they’re going to turn out. Are they going to be spendthrifts? Are they going to get into trouble? Things like that. When the kids are young, I usually say, okay, well they’ll always get money to be raised. And how that looks is very discretionary by the trustee. The language that we typically use is “health, education, maintenance, and support.” Those words will give us the ability—give the trustee the ability—to give the money to the beneficiaries or to the guardians of the beneficiaries to raise them right, for everything that they need, the standard of living that they’re used to. Then it’s up to you—the person who’s creating the trust—to decide at what ages do these people have the right to get the money.
A common fact pattern for young children is: a third at 25, a third at 30, and then the balance at 35. Why is that common? I think in a sense, at 25 it’s kind of the time in your life—hopefully you’re starting your life where you’re getting your first job, you want to maybe put a down payment on the first home, things like that. And then hopefully, you grow up a little bit, where you’re maturing with your financial wisdom, and that you’re able to take the next two distributions and be able to save it. That’s why it’s so common. I think those are good ages. Certainly, it could be every year—it doesn’t have to be five-year increments—but that’s just a common one.
I want to share one example that’s very interesting where sometimes people say, “Well, I don’t want my kids to think I don’t trust them.” It’s not really about trusting them; it’s about being able to give them the gift of the inheritance that they’re receiving but having kind of a wrapper around that gift—meaning, if it’s held in trust, then nobody can get to it that shouldn’t be getting to it, right?
For instance, if a beneficiary was receiving a million dollars and you die, and the child gets a million dollars. In six months this beneficiary gets into a car accident, and somebody is suing them, right? Well, now their inheritance is in their hands and now it’s available for the creditors, for the plaintiff, for the lawsuit—and you can’t do a thing about it. It’s already in your hands. But if it was held in trust for that beneficiary, then there are ways to protect it and not have it be taken away from their hands. Okay? It’s really important to be like, okay, it’s not that I don’t trust my children, I just don’t know what’s going to happen in their lives—the circumstances in their lives in the future that we have zero idea of, because we don’t have that crystal ball.
Things that we want to protect for are divorce. If one of your kids gets divorced, then that money can’t be part of the divorce settlement. Lawsuits, like I mentioned. Creditors—maybe your kids just get into some money problems, and we don’t want to have to give that money away to the creditors. That lends itself to bankruptcy. We don’t want to give to the creditors through a bankruptcy. We want to keep it in trust. And then last but not least is special needs. Perhaps you assume all these kids or all the beneficiaries will be healthy no matter what—no, we don’t know. We don’t have that crystal ball.
If you have that diagnosis one day and you’re disabled, and all of a sudden you’re getting government funds because you’re disabled, you can’t work—you don’t want to give that person money and then all of a sudden they’re getting disqualified from those benefits that they’re already getting. You can give them their cake and eat it too, kind of thing. As I say, give them the inheritance but put it in a special needs trust. That way they still get the funds from the government, but then they also get the funds that you’ve given them as an inheritance. Those are things that are like, never in a million years do you think about for your kids, but it certainly happens quite often.
The example I wanted to share with you today is interesting because people always ask me, “Well, I trust my kids, just give them the money, what’s the big deal?” But there are ways to do it appropriately where you still give them money—they’re fine—and yet that money is going to still benefit other people.
As an example, I had a gentleman who was my client, whose mother passed away way back when—I want to say 2009 or 2010. His mother died with about $8 million of assets. He received, out of the eight million, two million. And so he thought he was going to get his $2 million, he was going to be able to spend it and use it. But the trust that Mom created years before actually said something different.
The background about this gentleman is that he’s already gotten several inheritances from grandparents and various people. And Mom noticed that he kind of blew it and used it and had nothing to show for it. The gentleman was in his late 50s at the time that Mom passed away. He wasn’t married, didn’t have kids, and really didn’t have a job. Mom was really concerned about this money just being given to her son—$2 million—and maybe some woman marries him, steals it from him through a divorce or whatever—or that he spends it all on random things and then in two years he’s looking for more money, right?
I never worked with the mother, obviously. I never met the mother. But I’m just assuming the types of thoughts in her mind. What the trust said was, “Here son, here’s two million—however, it’s going to be held in trust, and you are going to receive three and a half percent every single year for the rest of your life.”
Of course, the instant gut reaction is, “What?!” He was really upset. He thought, “Why is that so unfair? Why am I only getting three and a half percent?” Back then, I was guiding him and working with him, and I said, “Well, you’re still getting—it’s about—it ended up being about $75,000 a year. And that’ll increase as this two million grows.” He still didn’t care. He still was upset. He said, “What do you mean?”
I want to make it clear that when you receive a distribution like that three and a half percent, he has received. It started at about $75,000–$80,000 and through the years, up until present day, it grew to about $90,000–$100,000 every year. You have to remember, this is inheritance to him, so it’s completely tax-free to him. Tax-free $80,000 to $100,000 a year, plus the trust allowed for medical expenses and various things—so all his dental, medical, long-term care costs were paid for by the trust. It’s not just the base number—he’s getting a lot more. The trust, even as of today, is still growing. I think right now it’s probably about $2.5 million, but he’s been receiving that three and a half percent every single year.
He ended up getting—by the time he hit 65, he was on Medicare, but this was his income, per se. I mean, sort of like a pension almost. And then when he passes, Mom wanted it to go to grandchildren.
My point of this story is, there are ways to distribute to your kids where they get a little something every single year. It still allows them to have a standard of living that they’re used to, but it doesn’t give them the opportunity to just blow it all. And then at the end of the day, it’s not going to someone that he marries and all of a sudden it goes to that surviving spouse—it’s actually going to go down the lineage. It’s going to go to the deceased mom’s lineage, right? It’s going to go down to grandchildren, and then it will, you know, pass down. So it’s like legacy money.
The point of this whole story is that there’s lots of different ways—there’s so many customized ways we’ve done distributions for our clients. It’s just a matter of taking a look at the size of your estate, your values. I’m very, very much keen on the values that you have—make sure that it’s instilled in the documents themselves. And taking a look at how we can customize it for you so you feel comfortable that when you’re no longer here, your kids will still carry on a good life. Not necessarily like, “Oh my gosh, I blew it all in two years and I wish Mom didn’t give it to me at once,” or they become drug addicts and it becomes money that’s gone to their addiction. A lot of what-ifs and errors can happen.
Let’s chat about your estate plan and do it right because I’m so passionate about this. I don’t know if you could tell—I’m passionate about making sure your hard-earned assets are given to the next generation and the next generation, and passed down as safely and as responsibly as possible. I’ve seen way too many horror stories, and I don’t want that to happen for you and your family—that I’m so passionate about. Just really diving into your scenario and doing the custom plan that you deserve.
Again, thank you for listening to our podcast today, and hopefully you call us and give us a chance to take a look at your estate plan to customize it for you.
Thanks, and have a great day. [Music]
