November 28, 2008

How Inheritances Are Lost - Part 3 of 3

By Robert P. Bergman
Special to the Times

In parts 1 and 2 of this series, I told the stories of Bill, Ruth, Marisa and John, all of whom lost their inheritances. Here are a couple more stories of how inheritances are lost.

Janet’s Story: Janet’s parents died, leaving her about $500,000 that she promptly invested. A few years later, Janet was out driving near the farmer’s market at her local mall when she lost control of her car and drove right through a crowd of people waiting in line.

Although nobody was killed and it was ruled an accident by the police and not intentional, Janet ended up seriously injuring 10 people. The resulting lawsuits against her ended up in judgments against her that were more than her automobile and homeowners’ insurance, and ended up taking almost everything she owned including the $500,000 inherited from her parents. Could the loss of Janet’s inheritance by accident have been avoided?

Mike’s story: Mike lost his parents when he was 16 years old. Even though his aunt and uncle held his $300,000 inheritance for him, when Mike turned 18 years of age, he demanded his inheritance from his aunt and uncle, who were obligated by law to turn the money over to him. Because Mike had no experience handling money, he spent his inheritance like there was no tomorrow. He dropped out of high school, bought a sports car, partied with his friends and managed to run through his entire inheritance within two years.

Instead of using the money to finish his education and help him get started in life, in two years Mike had no money left. He was reduced to working at a low-paying job just to put food on the table. If only someone else could have handled his inheritance for him until he was educated and knew more about money.

All of the children in the stories I have related in this series share the following in common – they all lost their inheritances because they received their inheritance outright from their parents, without any strings attached.

Is there an alternative that can protect a child’s inheritance from being lost in one of these ways? Yes. It is called the “Castle Trust Plan.”

The Castle Trust Plan protects your child’s inheritance by passing the inheritance to your child in trust instead of directly to your child. Your child has the use and benefit of the property held in the trust, and may use as much of the income and other property in the trust that is necessary for your child’s needs in the areas of health, education, maintenance and support. However, your child does not actually own the property – it is owned by the trust.

This form of trust provides a high level of asset protection for your child’s inheritance. Because the inheritance is not owned, it is almost impossible to lose it in a divorce, a lawsuit, bankruptcy or through mismanagement.

As an added benefit, when properly structured, a Castle Trust can also pass on the child’s inheritance to grandchildren and beyond with the same asset protection as for the child.

A Castle Trust is the sensible alternative to leaving an inheritance outright to a child. Should you consider a Castle Trust for your children?

Robert P. Bergman is a San Jose estate planning attorney and counselor who devotes his law practice exclusively to assisting individuals and couples plan for incapacity and the eventual transfer of their property to their heirs. Bob specializes in working with parents who have minor children. Bob gives a regular monthly seminar at the Addison-Penzak Jewish Community Center in Los Gatos entitled “Everything You Always Wanted To Know About Wills and Trusts, But Were Afraid to Ask!” Visit his website at www.lawbob.com where you can learn more, get on his e-mailing list, register for an upcoming seminar, schedule a consultation, and read other articles on estate planning topics that Bob has written. You can also reach him by e-mail at rpb@lawbob.com or by telephone at (408) 247-0444. All inquiries are confidential. This column is intended to provide general information about estate planning ideas, concepts, and laws, and is not to be relied upon as rendering legal advice about your particular situation. No attorney-client relationship is created by these articles. The laws concerning estate planning, wills, trusts, and estate taxes are very complex, often state-specific, and change on a regular basis. Consult with an experienced attorney before taking any action that would affect your personal or business matters.