When is “Beyond the Reach” Good?
What does it mean to leave assets to loved ones “beyond the reach” of their creditors or in-laws in a divorce? It means making provisions in advance in your will or trust that directs your assets will be left to your loved ones “in trust”. If done properly, assets left can be protected from their creditors, and protected from loss in the event of their divorce, and we can ensure the assets will stay in the family blood line and ultimately be used to benefit grandchildren and their education, if necessary. It’s really as simple as that for most people.
For instance, let’s say, Mabel (a widower) and her son Jim have decided Mabel needs to create some legal papers so Jim will not have any problems handling Mabel’s affairs (financial and health matters) if she becomes incapacitated or passes. Mabel owns real estate in New Jersey and South Carolina. Jim is married to Janet and they have one child named Frank who has special needs and is receiving government benefits. Mabel can do many things but let’s look at two courses of action that yield very different results.
OPTION 1: Mabel creates a will saying all her assets go to Jim, and if he predeceases to Frank. She also names him as her agent for finances and health matters. When she passes, what happens? Jim will have to go through probate in two states: New Jersey and South Carolina. This will be expensive. Then, once Jim inherits all the property and it is in his own name, he can lose half by divorce or all by other lawsuit. Janet wins. Frank and Jim lose.
OPTION 2: Mabel creates a revocable living trust and re-titles her real estate and other non qualified assets into her trust.
Will Jim have to hire a New Jersey law firm? Not if Mabel is domiciled in South Carolina.
Will Jim lose any of what he inherits from Mabel to divorce or other lawsuits? Not if the revocable living trust said Jim was to receive his share “in trust” and there was a spendthrift clause in the trust and South Carolina law governs.
Will Frank lose his government benefits when he inherits a beneficial interest in Mabel’s assets? Not if Mabel’s revocable trust had provisions indicating that whatever Frank may get is to be placed in a “special needs trust”.
Let’s say that Mabel’s assets are substantial but not subject to the estate tax. If she leaves these “free of trust” to Jim, then these assets will be exposed not only to potential loss in divorce or to creditors claims during Jim’s life, but also to estate tax exposure upon Jim’s passing before it goes to Frank.
When planning to protect your assets, consider that avoiding estate taxes and deferring income taxes is just one aspect of it. Leaving assets protected and guaranteed to stay in your family is another big part.
Mark F. Winn, J.D., Master of Laws, LL.M. in Estate Planning, is a local tax, asset protection and estate planning attorney.