Benefits of a Dynasty Trust

Dear Len & Rosie,

We have three grown children with children of their own and we have a trust. We want our children to be the beneficiaries but want to set it up so that, should they divorce, the spouse would not have a right to the inheritance. I know that an inheritance comes into the marriage as separate property but I thought that, if the pool is used for community expenses, mortgage, etc. that the whole thing could become community property. Yuk. Is there a way to ensure that it will stay separate property? We don’t mind if our children purposely use the funds for their families, but would like to set it up so that they can keep the remainder of the inheritance should they divorce. What should we be looking for?

Patricia

Dear Patricia,

Most parents think the way you do. They don’t want to look down from above and see their ex-son-in-law driving a Lexus bought and paid for with their daughter’s inheritance. Normally, you do not have to worry about your childrens’ spouses inheriting anything from you. They will get nothing upon your deaths, unless you specifically say so in your wills or trust. What you have to worry about is what happens to the inheritance once it’s in the hands of your children.

An inheritance is separate property, but many children, either by mistake or on purpose, commingle their inheritance with community property assets, or even transmute their inheritance to community property. There are a couple of options available to you to help your children not do this.

The first is education. The trick to keeping separate property separate is to keep it separate. While that may not make much sense, it can be pretty simple. Your children should know to put any inherited assets into brand new accounts in their names alone, preferably at different financial institutions. Then, they need to know that they should never put anything else into these accounts that may be community property. If your children create trusts to avoid probate, these accounts should be identified as being their sole and separate property.

But some children just won’t listen to their parents. They’ll listen to their spouses instead when late at night they hear “Honey, if you love me you’ll put your inheritance in both of our names.” If you are worried about that happening, there’s a better alternative than trusting your children to look out for their own interests. You can leave them their inherited assets within dynasty trusts. Depending on the circumstances, you can make each child the trustee of his or her own dynasty trust. Each trust will make payments to your children for their support and education. The trustee won’t be able to transmute the inheritance to community property. If there’s a divorce, your son-in-law won’t walk away with your money.

There are other benefits to dynasty trusts, including protection from the creditors of your children, and estate tax avoidance on the deaths of your children. And you can also put restrictions on the ability of your children to give away the family legacy when they die. You can make them leave it all to their children when they die, allowing you to keep your accumulated wealth in your family for generations to come.

Len & Rosie

Right of Representation

Dear Len & Rosie,

My aunt just died. She lived alone and never had any children. We found a will in her safe deposit box. The will is dated 1978 and named no executor. My aunt left her estate equally among my father, who is dead, her sister, who is in a nursing home, and her late husband’s children. What happens to my father’s share? Does it automatically go to his heirs?

I have made the funeral arrangements. I have also frozen her credit card accounts and will take care of her house. What do we do next? How can we pay her bills or conduct her business? This is a mess. We can’t afford to pay her expenses out of our pockets. How do we get things paid out of her estate?

Sue

Dear Sue,

Without reading your aunt’s will, we cannot tell you whether or not you and your siblings shall inherit your father’s share. If the gift was made to your father by “right of survivorship”, then it lapsed upon your father’s death and will be divided among your surviving aunt and the step-children.

If you are lucky, the gift was made by “right of representation” or by “per stirpes”. In this case, your father’s share will pass to his issue. You and each of your siblings will get one share, and if you have a deceased sibling, that child’s share will pass to his or her descendants. If your aunt’s will is silent on this issue, your father’s share will likely go to you and your siblings anyway, by operation of California’s “anti-lapse” statute.

It’s too bad that your aunt never updated her estate plan, not only because of your father’s death, but also because her sister is in a nursing home. If your aunt is on Medi-Cal, she will likely lose her Medi-Cal benefits until the inheritance is spent down or sheltered by Medi-Cal planning.

What you need to do next is to go see a trusts and estates lawyer. He or she can review the will and tell you who’s going to wind up with your father’s share. The lawyer can also start the probate. It doesn’t matter that the will does not name an executor. You can be appointed by the court as your aunt’s administrator, even if you will not inherit.

When the probate petition is filed with the court, the court clerk will schedule a hearing before the judge to admit your aunt’s will to probate. This hearing will take place about five or six weeks after the papers are filed, because notice of the petition must be published in a newspaper where your aunt lived for four weeks, and her legal heirs and the persons named in the will are all entitled to 30 days notice. Assuming everything is in order, you will be appointed as the administrator of the estate and you will be givien “Letters of Administration” that will allow you to gain access to your aunt’s accounts.

But that’s only the beginning of probate. You will need to file an inventory and appraisal and probably sell your aunt’s home. After all that, you can submit an accounting to the court and get an order to distribute the estate to your aunt’s heirs. It’s a process that will last at least 9-15 months. Welcome to Probate.

Len & Rosie