Episode 4: Keeping Your Money Away From Your Shifty Son-in-Law
Hello, it’s Peter Klenk here, trust and estates attorney here to talk to you a little bit more about death and taxes. Today’s subject is how to keep your money away from your shifty son-in-law. You can fill in daughter-in-law if you’d like, but you get the idea.
You’re doing your planning for your money you worked for over a long time, your whole life, it’s yours. Yeah, you’ll be dead, and you won’t know what’s going on, but you’d prefer that it’s used wisely. It’s used to take care of your family, or someone that you’re going to leave it to. So, how do you leave it to them when maybe they’re with somebody, you don’t trust much, right? And there’s a subtext here to whatever, it’s just you want to keep it away from the craziness that life throws at you – you know what I mean?
Life seldomly goes as you plan it, right? So, what do you do to protect your kid? What we’re going to get to is, we’re going to talk about trusts. There’s a lot of different ideas for specific sets of circumstances that you might be in, but in general, setting up a trust for your kid is the most basic way to handle things. It’s been around for a long time; it’s tried and true. It’s just a good option. And you should at least explore this one at the beginning.
So, okay, what is it trust, right? So, a trust is something that we have here that most of the world doesn’t have. It’s something we got from the British. They parted company with us in the 1770s (or we parted company with them), but we kept a legal system. The idea of a trust is based around when a guy would die under English law and everything went to his eldest son. What do you do if the son’s a baby, he can’t run the farm, he can’t take care of the money? So, you have to set up a system to take care of the funds for the kid till they’re older, and this was the basis of coming up this whole concept over hundreds and hundreds of years. And the idea is this… that there’s three components, a trust is something that first you have a grantor (the person who grants the power) to a trusted friend, to hold on to the assets for another person’s benefit.
So, there’s all the words we use, right? The grantor, granting the power, the trustee, the trusted person handling things, and the beneficiary, benefiting from it. The most ancient way of looking at this, the most tried and true ways, is if somebody has died, it’s the only time you need it that that’s why it was created, right? So, we’re going to talk about the most basic way that these are used, which is in a will. Trust under will is what it would be called, which you can form while you’re alive. It’s called inter vivos. You can do revocable trusts, and then there’s Insurance Trust. There’s lots of things. We’re going to talk about about “trusts under wills,” and all that means is if the trust is created in your will, so you know when your will comes into effect when you’re dead. So, it won’t affect your day-to-day life at all.
You want to take all your money and put it on red on the day you die and see if you you’re lucky – go for it! This doesn’t stop you from doing any of that, but, you know, it’s something in your will that comes into effect when you die. So, it’s a very basic way of thinking about it, the will can say when I die, then everything gets divided up and there’s a share for each of my kids. Right? One kid, two kids, however you want to do it, and the trust is created. It comes to life when you die, it isn’t funded right away, because of course, we have to file your will, get your assets, pay your bet, your creditors, your funeral. But when you’re done, what’s left goes in there.
Now, here’s the key to understanding all this… who owns that money? Well, the answer is the trust. So, what does that mean? Well, when you died, your will said form these trusts, one for each kid, and fund it equally. So, did the trustee get the money? Well, no. Right? The trustee just handles the money. The trustee is like an employee. Right? They’re managing it. So, if the trustee gets himself sued or gets himself somewhere in trouble, gets divorced, it doesn’t affect the trust, because they’re just an employee, because just like one of your employees gets get sued or divorced it doesn’t affect you.
How about the beneficiary? Did your kid get anything? No, the kid didn’t get anything. They’re the beneficiary. They benefit from the situation. The trust owns it – that’s the key here. The trust in our legal system id looked at like a living person, and you gave birth to this person at your death, you created this trust, and it owns stuff, it can invest the money you can hire people who manage the money, you can hire an accountant, you can invest it in real estate, bitcoin or a chicken farm, or whatever. You can invest in anything. But it’s the trust doing that. Now, the trust is a piece of paper, right? So the trustee is acting, but acting on behalf of the trust, right? They don’t own it; they just manage it. And how about the beneficiary? Well, they just benefit. So they don’t own anything. So what if the beneficiary, your child, gets divorced? Well, depending on what state they live in, half that money might go to their spouse that they own, but they don’t own anything in the trust. Now, could the trustee pay for their bills? Absolutely. That’s the whole idea. But they don’t have to. That’s the key here. Right? They can, but they don’t have to. So that way your child gets filed with divorce proceedings the day after you die, because your son or daughter-in-law has been waiting to cash in? Well, too bad, right? They’re not going to get anything.
Now, in the long run, how does this all work? The trust is funded, it’s invested in. Typically you open an account with an investment advisor or bank, and it’s usually in stocks and bonds or Treasury bills, but it can be real estate, could be anything owned by the trust, and then used for the beneficiary. Well, who’s doing this, the trustee? Who’s going to be the trustee? Well, that’s always an interesting question.
So, it kind of comes down to trust right? Most people trust their kid, but they just think they have a blind spot for this idiot son-in-law or whatever. So, they don’t necessarily think that they’re going to give the person the money and lose it all. They just don’t want them to lose it in the divorce that they’re not going to see coming. Well, then your kid can be the trustee. Now, there’s certain considerations about what powers you can give them. You have to talk with your estate planning advisor about the terms of the trust, but your kid can be the trustee, and that’s fine. Remember, you form the trust, you’re the grantor, you put the money in the trust, right? It’s your instruction. They didn’t do anything, they’ve never owned it. So who runs it, in most trusts, doesn’t really matter. It can be anybody. So, if your kids, the trustee, and you trust them to look out for themselves and their own selfish best interests, that’s fine. Because you know what? They work for free. They didn’t when they were teenagers, but they will now, and they can hire people to advise them if they want to, that’s fine. A banker, wealth advisor, accountant, that’s fine. They can get advice. They don’t have to know how to do this. You’re just trusting that they’re not going to turn it over to their spouse or do something silly. Now, look, here’s where the rubber meets the road. Once you make your kid the trustee, you know who’s watching over them? Nobody. So, if they follow the rules, well, then someday they get divorced or sued, then somebody tries to get in the trust, they can say, “Well, look, I’ve never owned this. And look, I follow the rules.” And there it is, it should be safe.
But, let’s say they break the rules. And they start emptying the trust in big chunks and doing all sorts of things, or not, and now they’ve weaken the wall. Right? And now they’ve given that creditors mouse a finger hold that they might not get anything, but now they can fight about it.
The other answer is, if you die and your kids the trustee, and they say, I’m just going to empty it. Nobody is going to stop them. They’re the boss. They’re the one enforcing the rules. So, don’t feel like this is like, well, I’m dictating from the grave. You can say, “well, no, what I really did is I, I built a wall around this thing, protective wall,” and I’m letting my kid know that it’s there. And if they want to use it, good for them. If they don’t, great for them, right? I can only do so much for this kid. Now, can they take some money out and buy their spouse pretty things? Yeah. But they don’t have to.
Now if you think your kid just can’t be trusted for whatever reason to be in charge or is going to be taken advantage of if they just don’t see the dangers out there, you can hire somebody to be a trustee. There are plenty of nice trust companies out there. They charge for their time, but it’s not terrible at all. And remember, you’re earning protection here for you and your child, right? Protecting them from themselves, helping them manage the money, making sure that it doesn’t just get wasted. If they need it, they can empty it and pay the bills, right? But if they don’t invest it, let it grow, because these trusts in several states, including Pennsylvania, New Jersey, they can go forever, never have to end. So the other advantage of these things is you’re not only protecting your kid, you’re protecting your grandkids, at your child’s death. The money can roll over, and continue on to your grandkids, and nothing goes to your son-in-law. You can draft it that way. So, it’s a consideration. You know, what happens, though? A lot of people look at it say, “well, look, you know, I’m going to let my kid have the right to say where it goes.” The default is it stays in the family. But if your kid wants to give their spouse $5,000 a month until they die, or something like that, I’m going to let them decide, but I don’t have to, I’m just giving them the power to be able to do it.
So, that’s a good system. I’m telling you it works great. It’s been around for hundreds of years. It is tried and true and works very nicely. And you can craft around this, because it is very general and fits most people, but if you have a special circumstance, we can modify and go around that and change it.
If you’re in Pennsylvania, New Jersey, and you want to talk about this, give me a call, we’re just brainstorming, but if you’re outside of that, call your estate planning professional. There are attorneys out there and this is what we do, right? Give them your information, see if it’s a good fit, put it in place. It’s one of those things that, especially if you put your kid in charge of it, when you go, what’s the downside? You’re only helping them and if they don’t want it fine, but you’re setting something up so that you’ve done what you can do to protect your money. It is your money, and you’d like to be able to think it’s going to be used on something productive and useful for your family. Trusts are something that helps you with that goal.
Stay tuned. As the months go along, I’ll keep posting things and if you have any ideas for what you’d like to hear about, just let me know – that’d be great! Otherwise, you guys all take care, and we’ll talk more about death and taxes in the future by now.