Episode 31: What I Told John…. So You Don’t Make the Same Mistake

Estate Planning Lawyer, Peter Klenk

What I Told John…. So You Don’t Make the Same Mistake

It’s Peter Klenk. I’m like, Kwa here. And once again, talk to you about death and taxes. This fascinating subject that we trust the states people deal with every day.

I have my cup of coffee. Hopefully, you have one. Let’s sit and chat.

And that today’s subject is what I told John, so you don’t have to make the same mistake. That’s a long way of saying, look, some people come in to me, and they have certain ideas that I need to talk them down from. They’ve thought a lot about them. They—look, they know their family better than I do, obviously. But they’re ideas that in the end would probably cause more trouble and conflict than they’re worth, basically. But maybe more—what they’re trying to avoid is what’s gonna end up coming back.

It says, remember folks. You know, it’s kind of a joke around here and all, but it’s true. Come on. It’s funny. Yeah. Right? We’re gonna be dead. All these things we’re planning are for the future. And we just don’t know what’s gonna happen. Right? Life takes its own routes. Kids go their own ways. Grandkids—God knows where they go. All sorts of things are gonna happen.

If you make things too restrictive, well, you know, it really might cause a big problem that you can’t foresee. You don’t know where they’re gonna live. You don’t know what their jobs are gonna be. You don’t know who they’re gonna marry.

So where is a typical example? Let’s talk about no trust. Because most people will come to me and say, “Pete, I love this trust that you want to set up. And let’s do that. I wanna be sure that my kid can enjoy my money when I’m gone, but I don’t want them to have it taken from them,” which is perfect.

And if you guys—if you’ve listened to other trusts—you know the basics of this. You know, will or revocable trust. Typically, you grant the power to a trustee to hold on to the inheritance for your child’s benefit. I mean, a lot of times, if the kid’s old enough, of course, the kid is the trustee.

But that way, when you pass, the trust owns the assets—not your kid. So if your kid gets divorced, sued, goes bankrupt, there is this protection because they don’t own the asset. Right? Like in the marital example, marital property gets divided. But if your kid never owns an asset—well, it’s not marital property. Right?

So the trust is a great thing.

And then—but then instead of making it real broad and saying, “Kid, spend it” and just leave it in the trust until you do spend it, there are restrictions. And always good intentions. I mean, look, you know your kids better than I do—your grandkids, whoever you’re setting these things up for. And it’s usually with good intention.

But again, in the long run, you gotta remember this thing is gonna exist after you go. And you don’t know what’s happening in the future.

So for example, let’s just use a real simple example. People come in and say, “Well, I wanna set it up so that my child can only use the assets if they finish their four-year college degree.”

Now, of course—best intentions. Right? College is good. There’s gonna be plenty of money in the trust to pay for it. Get your degree. Don’t be a bum. Get a job. All these sorts of things, right? That’s what’s going through people’s minds.

But I mean, think about that. What if you go, and your kid joins the Marine Corps? Why does he get no right to join the Marine Corps? It’s a great place. He goes off, does the Quantico, has a great career, never gets a degree—no need to. And then after retiring from the military, goes off, starts a business—successful, great family, wonderful kids—never has access to the money, ever.

Instead, maybe that first tour in Quantico comes up, and there’s a duplex for sale in town. And man, it would be a beautiful, beautiful investment. Right? Because, you know, while he’s there, he can live in half of it. He can rent the other half out. And then later, he can rent it all out as he goes. And by the time he retires from the Marine Corps, he’s got five or six of these babies. I mean, that’s great. Wonderful investment.

But if you say they can’t use the assets until they have the four-year degree—none of that’s gonna happen.

Now, that’s one example. And I’m using it—it’s a true, true example. I’ve seen it happen. I mean, you know that—if you guys know my background—I was in the military. I was in the JAG Corps. And I saw things like that happen.

And so it’s unforeseen potential circumstance. Right? That can come from what is—and it is—with good intent, but with that restriction.

And then the other part of it is, depending on what you do—sometimes it’s “you have to get a prenup.” Okay. Look, the trust already protects the asset. But if you require a kid to get a prenup—okay, belt and suspenders. Nothing ever wrong with that.

But now, maybe their relationship—your kid’s relationship—is just not a prenup kind of relationship. And now he has a choice of, you know, not getting married, right? Or just never having access to the funds.

And they might really need it—for first-time house, to pay for the wedding, right? To grandkids’ education, to special school. But now you’ve painted them into a corner where they can’t access the funds.

Unfortunately—right—unforeseen circumstances.

What do I tell people? I said, look, the idea here is you gotta have trust in the trustee. Right? That’s what this really comes down to. That’s where the name comes from. You’re trusting the person to follow the terms.

So remember—if you say, “Kid, you can only access the funds if you got your four-year degree,” and you make the kid the trustee—well, you know who’s enforcing those rules. The kid as the trustee. So if they choose to ignore them, now they’re breaking the rules.

But you know who’s gonna stop them? Well, nobody. Right? Nobody’s gonna stop them because—you’re dead. Right? There’s no policeman watching this. But now you made this circumstance where they’re not doing what they’re supposed to. They get sued. And on the other side, the person could say, “Well, he’s not following the rules, Judge. Why should I be forced to follow the rules? Let me get into the trust.”

You’ve weakened the whole wall. Right? And we don’t want to do that. We want to keep the walls up around the funds and keep them strong. Right? So that they’re protected, and they protect the assets.

So think through restrictions that you might want to make, and think if you can solve this with a trustee.

Because now look, there are examples. If your kid has a terrible gambling addiction—if you put your kid in charge, no matter what you say, the gambling addiction’s gonna win. The money’s gonna be gone.

Well, then having a trustee in charge that follows the rules is a good idea. Right? You can put a bank in charge, a family member, somebody—and you’re doing it because it’s the best thing for your kid.

Does it cost money? Obviously. You gotta pay these people. They should be paid. But now they can look out for your kid.

Okay. You know, maybe you want to say that there’s a restriction on how the funds can be used, and now the trustee is gonna follow them—because it’s not the beneficiary’s issue. Right? It’s going through.

But even then, even if it’s your kid with a mental health issue, or gambling addiction, or something else, or—you know—they’re married to a spouse who manipulates and controls them—if you put a good trustee in charge…

Again, I always look at it as—the ideal is that you get a trustee that you trust. And you just give them discretion because you don’t know what the future is. You just don’t know what the future is.

You know, maybe they found a cure for the illness and your child’s not on Medicaid anymore. You know, maybe they divorced the spouse and they moved on with somebody who’s super good for them. You don’t know.

But if you have a trustee, they can react to that and now be more liberal with the funds in the future—when it’s actually good for the person. Right? To help them out. Then that’s the best.

And what I tell people is—you can always write a manifesto. You can always say, “Look, I’m gonna name the trustee. The trustee is my brother. He’s gonna run this thing until my kid’s thirty-five because this kid happens to be a knucklehead with money.”

“I’m gonna give him broad discretion, but I’m gonna write a little non-binding manifesto—because I trust my brother.” Right?

And the manifesto says that it should only be used for these things. “Even though I’m giving you discretion to buy them a Porsche, man, do all these things if you wanted to—I know you’re not going to, because I trust you. And I only want it used for school if that’s the best way for it to be used.”

But obviously then it’s open. So if your kid decides not to go to school but has a good job, is starting a career, needs a little money for starting a business, between a wedding, you know, a down payment on a house—your brother’s free to do that. Right? Even though the child hasn’t hit that level of maybe education or whatever that you thought was good for them.

So trusting your trustee is really the key to this. And that way, they can follow your manifesto if it makes sense. It’s still reasonable. But if it’s not, then they don’t. But that’s in the best interest of your child—under the circumstances that exist then.

So the key here is: Don’t make this mistake.

Don’t think about all sorts of very complicated ways that people have to go through to trigger getting the inheritance—if it really could come back at you.

And better—if you can—write all those restrictions down and tell the trustee: “Here’s my wishes. And if it makes sense, and if it’s good for my child, make them do it.”

Right? Don’t give money if they’re sitting around, la la, gaga, and not graduating, and they’re partying too much or sitting on the beach, surfing all the time. Don’t have a job? Don’t help them. You don’t help them. That’s fine. Tell them to get going. And once they’re back—then that’s fine.

But if the scenario is such that they really need help—they can get it.

So that’s it, guys. That’s what I would tell a client if they came in. We can brainstorm.

So that helps. You can think about that. Because maybe then—before you call and talk to me about your estate plan—you’ve kind of pondered through this and we’ll have better use of our time. Right?

We’ll be able to craft something that fits your family the best way possible.

So this is Peter Klenk. I’m gonna sign off. It’s been fun talking to you again, and I look forward to speaking to you next time about death and taxes.

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