Many of my clients express their desire pass down to their estate to their children and eventually to their grandchildren. In other words, they want the assets to remain with their bloodline. While that sounds simple enough, an inheritance left directly to an adult child can easily end up in the hands of the child’s spouse through divorce, death, or mismanagement of the assets. To prevent your child’s spouse from winding up with the inheritance you leave to your child, I often suggest creating a bloodline trust.
Understanding the Problem
People are often under the misconception that assets bequeathed in a Will or trust to their adult child will automatically pass to their grandchildren upon the death of their child. In reality, that is not always the case. Even if your adult child gifts his/her entire estate to your grandchildren in a Last Will and Testament, state law may allow your child’s spouse to claim a “spousal election” that entitled the spouse to a specific dollar amount or a percentage of the estate. If your child were to pass away and leave an intestate estate behind, your child’s spouse would likely receive an even larger share of your child’s estate, including the inheritance you left for your child. Add in the possibility of assets being lost during a divorce or mismanagement by your child and/or a spouse and it becomes clear that the inheritance you intended to pass down to future generations may be at risk unless you take steps to prevent those risks. One option is to pass down the inheritance you leave behind through a bloodline trust.
How Can a Bloodline Trust Protect an Inheritance from My Child’s Spouse?
A bloodline trust is a special type of spendthrift trust created for the benefit of your children and/or grandchildren. In other words, for the benefits of your bloodline. Instead of leaving assets outright to your child(ren), those assets are left in a trust with no withdrawal rights. Depending on state law, you may have the option to name your child as the Trustee of the trust; however, appointing a professional Trustee is always a wise choice. If your child is the Trustee, and a lawsuit is filed against your child or your child becomes involved in a divorce, a successor Trustee will need to step up and take over the administration of the trust to keep the assets safe. Either way, you can use the terms of the trust to decide when assets are distributed to your children and grandchildren or if the child is the Trustee, he/she can have discretion to decide when assets should be distributed.
The point of a bloodline trust, however, is to keep the assets sheltered within the trust so that they are legally owned by the trust. In that case, assets held by the trust cannot be reached by creditors (with a few exceptions such as tax debts and child support obligations) of your child, your child’s spouse, your grandchildren, or any other beneficiaries. In addition, the assets will not be part of the division of property if your child and his/her spouse get divorced. Finally, if you appoint a professional Trustee, you dramatically reduce the likelihood that assets will be lost to poor management.
Best of all, assets held in a bloodline trust do not go through the probate process, meaning that the terms of your trust will remain private and that assets can be available to your child immediately upon your passing if you so choose.
Do You Need Help Protecting the Inheritance You Leave to Your Adult Child?
For more information, please contact our estate planning office in Owings Mills, Maryland by calling 410-654-3850 to schedule an appointment.
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