Read more about the article Avoid Maryland Inheritance Tax With a Domestic Partnership – Annapolis and Towson Estate Planning
Save on Maryland Inheritance Tax if you are in a committed relationship.

Avoid Maryland Inheritance Tax With a Domestic Partnership – Annapolis and Towson Estate Planning

As of October 1, 2023, Maryland’s Senate Bill 792 introduced a significant legal framework for domestic partnerships, offering couples who choose not to marry a pathway to secure some of the same benefits as married spouses, such as saving on the Maryland Inheritance Tax at death. Awareness of this change in the law will help you make informed decisions about personal relationships, legal protections, and financial planning. Here is what you need to know about registering as domestic partners and the implications of not doing so.

To establish a legal domestic partnership, Maryland Code Estates and trusts Section 2-214 requires two individuals to be at least 18 years old, the sole domestic partner of the other, not married, and in a committed relationship with the other individual.

The process to register a domestic partnership has become more streamlined. Couples seeking to enter a domestic partnership must register their relationship with the Register of Wills in the county in which they are domiciled by filing a signed and notarized declaration form. They also need to pay the appropriate filing fee. Once registered, the relationship will be recognized in all counties regardless of where the partners passed away in Maryland.

Registering as a qualified domestic partnership acts as a legal safety net which guarantees certain benefits during estate administration in Maryland, such as:

  • Inheritance: Now, a surviving domestic partner inherits in the same manner as a surviving spouse if there is no will, potentially receiving the entire estate if there are no surviving descendants or sharing it equally with minor children of the deceased partner.  Without registration, a domestic partner is treated as a legal stranger in the absence of a will, receiving no automatic inheritance rights.
  • Tax Benefits: Assets inherited from a registered domestic partner are exempt from Maryland’s 10% inheritance tax.  Not registering means any inheritance could be subject to Maryland’s inheritance tax, significantly reducing the net inheritance for the surviving partner.
  • Priority as Personal Representative: Domestic partners have priority to serve as the personal representative of their deceased partner’s estate.  Without registration, there is no legal priority for serving as the personal representative of your partner’s estate, which could lead to third parties or family members taking control.
  • Family Allowance: A surviving registered domestic partner is entitled to a family allowance of $10,000 upon the death of their partner.

In contrast, should one choose not to register as a qualified domestic partnership, in addition to losing the foregoing benefits, they risk a loss of other rights and interests, such as:

  • Legal Complexity in Termination: While registered partnerships can be legally terminated, unregistered relationships might face more complex legal battles over property or support if they end, especially if there’s no cohabitation agreement.
  • Lifetime Protections: Registration provides clear legal protections in areas like hospital visitation, which might not be automatically recognized for unregistered partners.
  • Future Legal Disputes: Without formal registration, disputes over shared property, support, or rights could be more contentious and less predictable in court.
  • If for any reason a partner needs to terminate the qualified domestic partnership, the State of Maryland requires a signed and filed termination form. This termination will take effect six months from filing, unless the reason for termination was by marriage or death.

Maryland’s new domestic partnership law represents a significant step forward in recognizing and supporting diverse relationship structures. Contact us to schedule a call with one of our experienced estate planning attorneys to guide you through the nuances of the law so you can make an informed decision about entering a domestic partnership and how it affects your legal rights and responsibilities.

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article How Wealthy People Save on Taxes—Can Regular People Do the Same? – Annapolis and Towson Estate Planning

How Wealthy People Save on Taxes—Can Regular People Do the Same? – Annapolis and Towson Estate Planning

As a direct result of tax cuts made in recent years, Americans can give nearly $13 million in assets without paying any federal estate taxes. Only 0.2% of all tax payers worry about federal estate taxes these days, explains the article “Here are six ways the rich save big on taxes, from putting houses in trusts to guaranteeing inheritance for future generations” from Business Insider. Could some of their tactics work for “regular” people too?

Among these tax avoidance techniques include putting homes and vacation homes in trusts lasting decades and any appreciation in the property’s value doesn’t count towards their taxable estate. Qualified Personal Residence Trusts, or QPRTs, basically freeze the value of real estate properties for tax purposes. The home is placed in the trust, which retains ownership for however many years desired. When the trust ends, the property is transferred out of the taxable estate. The estate only pays the gift tax on the property’s value when the trust was formed—regardless of the appreciation of the home.

Dynasty trusts allow taxpayers to pass wealth to generations who haven’t been born yet and are only subject to the 40% generation-skipping tax once. Florida and Wyoming allow these trusts to last up to 1,000 years, which spans about 40 generations. Heirs don’t own the trust assets but have lifetime rights to the trust’s income and real estate.

Charitable Remainder Trusts (CRTs) can be funded with various assets, from yachts to closely held businesses. Taxpayers put assets in the trust, collect annual payments for as long as they live and get a partial tax break. Only 10% of what remains in the CRT must be donated to a charity to qualify with the IRS.

Taking loans to pay estate taxes is scrutinized by the IRS and has many hoops to jump through. Asset-rich people use this method but are cash-poor and facing a big estate tax bill. The estate can make an upfront deduction on the interest of “Graegin” loans, named after a 1988 Tax Court case. Suppose illiquid assets comprise at least 35% of the estate’s value. In that case, families can defer estate tax for as long as 14 years, paying in installments with interest and effectively taking a loan from the government. However, Graegin loans are prime targets for IRS auditors and can lead to legal battles.

Private-placement life insurance, or PPLI, can pass on assets without incurring any estate tax. A trust is created to own the life insurance policy, which has been created offshore. This strategy is only for the very wealthy, as it usually requires $5 million in upfront premiums and a small army of professionals to set up and administer.

A down market has one silver lining for high-net-worth individuals: it’s an excellent time to create new trusts, as people can transfer depressed assets at a lower tax basis. The Grantor-Retained Annuity Trust (GRAT) pays a fixed annuity during the trust term; any appreciation of the asset’s value is not subject to estate tax.

An experienced estate planning attorney will know which of these strategies might work for your family, along with many others used by “regular” people.

Questions? Contact us to schedule an initial call with one of our experienced estate planning attorneys.

Reference: Business Insider (June 12, 2023) “Here are six ways the rich save big on taxes, from putting houses in trusts to guaranteeing inheritance for future generations”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article What You Need to Know About Estate Taxes – Annapolis & Towson Estate Planning

What You Need to Know About Estate Taxes – Annapolis & Towson Estate Planning

Most Americans don’t have to worry about federal estate and gift taxes. However, if you’re even moderately wealthy and want to transfer wealth to your children and grandchildren, you’ll want to know how to protect your ability to pass wealth to the next generation. A recent article from Woman’s World, “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance” provides a good overview of estate taxes. If any of these issues are relevant to you, meet with an experienced estate planning attorney to learn how your state’s tax laws may impact your children’s inheritance.

A well-created estate plan can help you achieve your goals and minimize tax liability. There are three types of taxes the IRS levies on gifts and inheritances.

Few families worry about federal estate taxes for now. However, this will change in the future and planning is always wiser. In 2023, the federal estate tax exemption is $12.92 million. Estates valued above this level have a tax rate of 40% on assets. People at this asset level usually have complex estate plans designed to minimize or completely avoid paying these taxes.

An estate not big enough to trigger federal estate taxes may still owe state estate taxes. Twelve states and the District of Columbia impose their own state taxes on residents’ estates, ranging from 0.8 percent to 20 percent, and some have a far lower exemption level than the federal estate tax. Some begin as low as $one million.

Six states impose an inheritance tax ranging between 10 percent and 18 percent. The beneficiary pays the tax, even if you live out of state. Spouses are typically exempt from inheritance taxes, which are often determined by kinship—sons and daughters pay one amount, while grandchildren pay another.

Taxpayers concerned about having estates big enough to trigger estate or inheritance taxes can make gifts during their lifetime to reduce the estate’s tax exposure. In 2023, the federal government allows individuals to make tax-free gifts of up to $17,000 in cash or assets to as many people as they want every year.

A couple with three children could give $17,000 to each of their children, creating a tax-free transfer of $102,000 to the next generation ($17,000 x 3 children x 2 individuals). The couple could repeat these gifts yearly for as long as they wished. Over time, these gifts could substantially reduce the size of their estate before it would be subject to an estate tax. It also gives their heirs a chance to enjoy their inheritance while their parents are living.

It should be noted that gifts over $17,000 in 2023 count against the individual estate tax limit. Therefore, your federal estate tax exemption will decline if you give more than the limit. This is why it’s essential to work with an estate planning attorney who can help you structure these gifts and discuss other estate tax and asset protection strategies.

Questions? Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Woman’s World (April 5, 2023) “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article What’s a Bequest? Annapolis and Towson Estate Planning

What’s a Bequest? Annapolis and Towson Estate Planning

 

Yahoo’s recent article entitled “Bequests vs. Gifts: Which One Do I Need?” explains that a bequest is the personal property given to beneficiaries through the terms of a will when the original owner dies. A bequest can be cash, stocks, bonds, art, jewelry, or other personal items. However, it can’t be real estate: when real estate is given to another person through a will or trust, it’s known as a devise.

There are four distinct types of bequests: specific, general, demonstrative and residuary. A specific bequest is the transfer of a particular asset, like jewelry, artwork, or automobiles, to a specific person. A general bequest is a gift, typically money, given from the person’s general assets (rather than from a specific asset). A demonstrative bequest is a gift that comes from a stated source like a bank account or retirement fund. Finally, a residuary bequest is a gift made after all debts are paid by the estate and other bequests are made.

You can also direct assets to be left to a nonprofit organization, like a religious or educational institution, as a charitable bequest. Charitable bequests can be specific, general, demonstrative, or residuary.

What distinguishes a bequest from a gift is when and how it’s given. While a bequest is property a person leaves to a beneficiary through a will following their death, a gift is given when someone is still alive.

When a person dies, their estate may be subject to one or more taxes called “death taxes.” These include the federal estate tax, state estate taxes and state inheritance taxes. However, most Americans don’t have to worry about paying federal estate taxes because they only apply to estates worth more than $12.92 million per individual ($25.84 million for married couples). Estates below this are exempt from this tax. Estates that exceed the exemption limit are taxed based on how far over the cap they go.

In addition to the federal taxes, some states charge their own estate taxes with separate exemption limits and rates. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington and the District of Columbia.

Finally, a few states have inheritance taxes, which are paid by beneficiaries who inherit property. This is different from estate taxes, which are paid by the estates themselves before property is transferred to beneficiaries. The states with inheritance taxes are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The Iowa state legislature voted to repeal its inheritance tax in 2021, and the tax will be gradually phased out until it is fully repealed in 2025.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Yahoo (Jan. 16, 2023) “Bequests vs. Gifts: Which One Do I Need?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Estate Planning Considerations for Minor Children – Annapolis and Towson Estate Planning

Creating an estate plan with minor children in mind has a host of variables quite different than one where all heirs are adults. If the intention is for the minor children to be beneficiaries, or if there is a remote chance a minor child might become an unintended beneficiary, different provisions will be needed. A recent article titled “Children need special attention in estate planning” from The News-Enterprise explains how these situations might be addressed.

Does the person creating the will—aka, the testator—want property to be distributed to a minor child? If so, how is the distribution to occur, tax consequences and safeguards need to be put into place. Much depends upon the relationship of the testator to the minor child. An older individual may want to leave specific dollar bequests for minor children or great-grandchildren, while people with younger children generally leave their entire estate in fractional shares to their own minor children as primary beneficiaries.

While minor children and grandchildren beneficiaries are excluded from inheritance taxes in certain states, great- grandchildren are not. Your estate planning attorney will be able to provide details on who is subject to inheritance, federal and state estate taxes. This needs to be part of your estate plan.

If minor children are the intended beneficiaries of a fractional share of the estate in its entirety, distributions may be held in a common trust or divided into separate share for each minor child. A common trust is used to hold all property to benefit all of the children, until the youngest child reaches a determined age. When this occurs, the trust is split into separate shares according to the trust directions, when each share is managed for the individual beneficiary.

Instructions to the trustee as to how much of the income and principal each beneficiary is to receive and when, at what age or intervals each beneficiary may exercise full control over the assets and what purposes the trust property is intended for until the beneficiary reaches a certain age are details which need to be clearly explained in the trust.

Trusts for minor children are often specifically to be used for health, education, maintenance, or support needs of the beneficiary, within the discretion of the trustee. This has to be outlined in the trust document.

Even if the intention is not to make minor children beneficiaries, care must be taken to include provisions if they are family members. The will or trust must be clear on how property passed to minor child beneficiaries is to be distributed. This may be done through a requirement to put distributions into a trust or may leave a list of options for the executor.

Testators need to keep in mind the public nature of probate. Whatever is left to a minor child will be a matter of public record, which could make the child vulnerable to scammers or predatory family members. Consider using a revocable living trust as an alternative to safeguard the child and the assets.

Regardless of whether a will or trust is used, there should be a person named to act as the child’s guardian and their conservator or trustee, who manages their finances. The money manager does not have to be a parent or relative but must be a trustworthy person.

Contact us to discuss your specific situation with one of our experienced estate planning attorneys and to create a plan to protect your minor children, ensuring their financial and lifestyle stability.

Reference: The News-Enterprise (Sep. 10, 2022) “Children need special attention in estate planning”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Some States Have Tough Estate and Inheritance Taxes – Annapolis and Towson Estate Planning

For now, most people don’t have to be scared of federal estate taxes. In 2022, only estates valued at $12.06 million or more for an individual ($24.12 million or more for a married couple) need to pay federal estate taxes. Even better for the very wealthy, there’s no federal inheritance tax for heirs who reside in such lofty economic brackets, notes the recent article titled “States with Scary Death Taxes” from Kiplinger.

By definition, estate taxes are paid by the estate and based on the estate’s overall value, while inheritance taxes are paid by the individual who inherits property, assets, or anything else of value. This isn’t to say “regular people” don’t need to worry about death taxes. We do, because states have their own estate taxes, and a few still have inheritance taxes.

A number of states eliminated estate taxes in the last ten years or so, in an effort to keep retirees from leaving and heading to places like Florida, where there’s no estate tax. However, a dozen states and the District of Columbia still have estate taxes, six states have an inheritance tax and one has both an estate and inheritance tax: Maryland.

Here’s how some state taxes look in 2022:

Connecticut has an estate tax, with an exemption level at $7.1 million. However, there is no inheritance tax. The Nutmeg state is the only state with a gift tax on assets gifted during one’s life.

The District of Columbia has an estate tax, with an exemption level of $4 million.

Hawaii’s estate tax exemption level is $5.49 million., one of the higher state estate tax exclusions, and is not adjusted for inflation.

Illinois’s estate tax is $4 million, but there’s no inheritance tax. It’s known as one of the least taxpayer friendly states in the country for retirees.

Iowa is phasing out inheritance taxes, but this doesn’t take effect until 2025. In the meantime, there’s no estate tax, and if the estate is valued at less than $25,000, there’s no inheritance tax. No taxes are due on property inherited by a lineal ascendent or descendent, but for other family members, the taxes range from 8%—12%.

There’s no estate tax in Kentucky. However, depending upon your relationship to the person who died and the value of the property, the inheritance tax is 4% to 16%.

Maine has an estate tax exemption of $5.87 million, but no inheritance tax.

Maryland’s has both an estate tax exemption of $5 million and a flat 10% inheritance tax (on transfers to individuals who are not direct relatives (e.g. – cousins, nephews, friends, etc.)

Massachusetts has no inheritance tax and a $1 million estate tax exemption.

Minnesota has a low estate tax exemption of $3 million. Any taxable gifts made three years prior to death are included.

New York, New Jersey, Rhode Island, Oregon, Vermont and Washington have no inheritance taxes, while Pennsylvania has no estate tax but does have an inheritance tax.

It’s not necessary to move purely to avoid estate or inheritance taxes. An experienced estate planning attorney uses strategic tax planning as part of an estate plan, minimizing tax liability and preserving assets.

Contact our office to schedule a preliminary call with one of our experienced estate planning attorneys to review your estate plan and determine whether there are strategies to reduce or eliminate estate or inheritance taxes.

Reference: Kiplinger (July 29, 2022) “States with Scary Death Taxes”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Is Elder Law? – Annapolis and Towson Estate Planning

WAGM’s recent article entitled “A Closer Look at Elder Law“ takes a look at what goes into estate planning and elder law.

Wills and estate planning may not be the most exciting things to talk about. However, in this day and age, they can be one of the most vital tools to ensure your wishes are carried out after you are gone.

People often do not know what they should do, or what direction they should take.

The earlier you get going and consider your senior years, the better off you are going to be. For many, it seems to be around 55 when it comes to starting to think about long term care issues.

However, you can start your homework long before that.

Elder law attorneys focus their practice on issues that concern older people. However, it is not exclusively for older people, since these lawyers counsel other family members of the elderly about their concerns.

A big concern for many families is how do I get started and how much planning do I have to do ahead of time?

If you are talking about an estate plan, what’s stored just in your head is usually enough preparation to get the ball rolling and speak with an experienced estate planning or elder law attorney.

They can create an estate plan that may consists of a basic will, a financial power of attorney, a medical power of attorney and a living will.

For long term care planning, people will frequently wait too long to start their preparations, and they are faced with a crisis. That can entail finding care for a loved one immediately, either at home or in a facility, such as an assisted living home or nursing home. Waiting until a crisis also makes it harder to find specific information about financial holdings.

Some people also have concerns about the estate or death taxes with which their families may be saddled with after they pass away. For the most part, that is not an issue because the federal estate tax only applies if your estate is worth more than $12.06 million in 2022. However, you should know that a number of states have their own estate tax. This includes Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington, plus Washington, D.C.

Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania have only an inheritance tax, which is a tax on what you receive as the beneficiary of an estate. Maryland has both.

Therefore, the first thing to do is to recognize that we have two stages. The first is where we may need care during life, and the second is to distribute our assets after death. Make certain that you have both in place.

Reference: WAGM (Dec. 8, 2021) “A Closer Look at Elder Law“

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Should I Try Do-It-Yourself Estate Planning? – Annapolis and Towson Estate Planning

US News & World Report’s recent article entitled “6 Common Myths About Estate Planning explains that the coronavirus pandemic has made many people face decisions about estate planning. Many will use a do-it-yourself solution. Internet DIY websites make it easy to download forms. However, there are mistakes people make when they try do-it-yourself estate planning.

Here are some issues with do-it-yourself that estate planning attorneys regularly see:

You need to know what to ask. If you are trying to complete a specific form, you may be able to do it on your own. However, the challenge is sometimes not knowing what to ask. If you want a more comprehensive end-of-life plan and are not sure about what you need in addition to a will, work with an experienced estate planning attorney. If you want to cover everything, and are not sure what everything is, that is why you see them.

More complex issues require professional help. Take a more holistic look at your estate plan and look at estate planning, tax planning and financial planning together, since they are all interrelated. If you only look at one of these areas at a time, you may create complications in another. This could unintentionally increase your expenses or taxes. Your situation might also include special issues or circumstances. A do-it-yourself website might not be able to tell you how to account for your specific situation in the best possible way. It will just give you a blanket list, and it will all be cookie cutter. You will not have the individual attention to your goals and priorities you get by sitting down and talking to an experienced estate planning attorney.

Estate laws vary from state to state. Every state may have different rules for estate planning, such as for powers of attorney or a health care proxy. There are also 17 states and the District of Columbia that tax your estate, inheritance, or both. These tax laws can impact your estate planning. Eleven states and DC only have an estate tax (CT, HI, IL, ME, MA, MN, NY, OR, RI, VT and WA). Iowa, Kentucky, Nebraska, New Jersey and Pennsylvania have only an inheritance tax. Maryland has both an inheritance tax and an estate tax.

Setting up health care directives and making end-of-life decisions can be very involved. It is too important to try to do it yourself. If you make a mistake, it could impact the ability of your family to take care of financial expenses or manage health care issues. Do not do it yourself.

Reference: US News & World Report (July 5, 2021) “6 Common Myths About Estate Planning”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Checklist for Estate Plan’s Success – Annapolis and Towson Estate Planning

We know why estate planning for your assets, family and legacy falls through the cracks.  It is not the thing a new parent wants to think about while cuddling a newborn, or a grandparent wants to think about as they prepare for a family get-together. However, this is an important thing to take care of, advises a recent article from Kiplinger titled “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?

Every four years, or every time a trigger event occurs—birth, death, marriage, divorce, relocation—the estate plan needs to be reviewed. Reviewing an estate plan is a relatively straightforward matter and neglecting it could lead to undoing strategic tax plans and unnecessary costs.

Moving to a new state? Estate laws are different from state to state, so what works in one state may not be considered valid in another. You will also want to update your address, and make sure that family and advisors know where your last will can be found in your new home.

Changes in the law. The last five years have seen an inordinate number of changes to laws that impact retirement accounts and taxes. One big example is the SECURE Act, which eliminated the Stretch IRA, requiring heirs to empty inherited IRA accounts in ten years, instead of over their lifetimes. A strategy that worked great a few years ago no longer works. However, there are other means of protecting your heirs and retirement accounts.

Do you have a Power of Attorney? A Power of Attorney (“POA”) gives a person you authorize the ability to manage your financial, business, personal and legal affairs, if you become incapacitated. If the POA is old, a bank or investment company may balk at allowing your representative to act on your behalf. If you have one, make sure it is up to date and the person you named is still the person you want. If you need to make a change, it is very important that you put it in writing and notify the proper parties.

Health Care Power of Attorney needs to be updated as well. Marriage does not automatically authorize your spouse to speak with doctors, obtain medical records or make medical decisions on your behalf. If you have strong opinions about what procedures you do and do not want, the Health Care POA can document your wishes.

Last Will and Testament is Essential. Your last will needs regular review throughout your lifetime. Has the person you named as an executor four years ago remained in your life, or moved to another state? A last will also names an executor for your property and a guardian for minor children. It also needs to have trust provisions to pay for your children’s upbringing and to protect their inheritance.

Speaking of Trusts. If your estate plan includes trusts, review trustee and successor appointments to be sure they are still appropriate. You should also check on estate and inheritance taxes to ensure that the estate will be able to cover these costs. If you have an irrevocable trust, confirm that the trustee is still ready and able to carry out the duties, including administration, management and tax returns.

Gifting in the Estate Plan. Laws concerning charitable giving also change, so be sure your gifting strategies are still appropriate for your estate. An estate plan review is also a good time to review the organizations you wish to support.

Reference: Kiplinger (July 28, 2021) “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

A Trust can Protect Inheritance from Relatives – Annapolis and Towson Estate Planning Attorneys

It is always exciting to watch adult children build their lives and select spouses.  However, even if we adore the person they love, it is wise to prepare to protect our children, says a recent article titled “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer” from Kiplinger.

After all, why would you want the assets and money that you accumulated over a lifetime to pass to any ex-spouse, if a divorce happens?

With the current federal estate tax exemptions still historically high (although that may change in the near future), setting up a trust to protect wealth from federal estate taxes is not the driving force in many estate plans. The bigger concern is how well your children will do, if and when they receive their inheritance.

Some people recognize that their children are simply not up to the task. They worry about potential divorces, or a spendthrift spouse. The answer is estate planning in general, and more specifically, a well-designed trust. By establishing a trust as part of an estate plan, these assets can be protected.

If an adult child receives an inheritance and commingles it with assets owned jointly with their spouse—like a joint bank account—depending upon the state where they live, the inheritance may become a marital asset and subject to marital property division, if the couple divorces.

If the inheritance remains in a trust account, or if the trust funds are used to pay for assets that are only owned in the child’s name, the inherited wealth can be protected. This permits the child to have assets as a financial cushion, if a divorce should happen.

Placing an inheritance in a trust is often done after a first divorce, when the family learns the hard way how combined assets are treated. Wiser still is to have a trust created when the child marries. In that way, there is less of a learning curve (not to mention more assets to preserve).

Here are three typical situations:

Minor children. Children who are 18 or younger cannot inherit assets. However, when they reach the age of majority, they can. A sudden and large inheritance is best placed in the hands of a Trustee, who can guide them to make smart decisions and has the ability to deny requests that may seem entirely reasonable to an 18-year-old, but ridiculous to a more mature adult.

Newlyweds. Most couples are divinely happy in the early years of a marriage. However, when life becomes more complicated, as it inevitably does, the marriage may be tested and might not work out. Setting up a trust after the couple has been together for five or ten years is an option.

Marriage moves into the middle years. After five or ten years, it is likely you will have a clearer understanding of your child’s spouse and how their marriage is faring. If you have any doubts, talk with an estate planning attorney, and set up a trust for your child.

Estate plans should be reviewed every four or five years, as circumstances, relationships and tax laws change. A periodic review with your estate planning attorney allows you to ensure that your estate plan reflects your wishes.

Reference: Kiplinger (April 16, 2021) “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys