“How Inheritances Are Lost! (Castle Trust Planning Revisited)”
By Robert P. Bergman, Attorney at Law
There is a saying in China, repeated in various forms in other cultures, that roughly translates as follows:
“From rice paddy to rice paddy in three generations.”
In general, what this means is that the first generation of a family, many times poorly educated but hard working and driven by strong cultural values, often has built a family fortune to pass on to the next generation. Here in the Silicon Valley, it can be seen in the many family businesses built by the first members of a family to move into the valley, often from other parts of the country or the world. Orchards, farms, restaurants, department stores, wineries, convenience and grocery stores, and many other businesses fit this pattern. It can also be seen in the many success stories of immigrants and others achieving financial success in the tech industry.
The second generation is often better educated, with the education paid for from the family fortune built by the first generation. This generation may still have many of the values of the first generation, and may also have an interest in continuing the family business, building further wealth.
The third generation, however, is often still better educated than the previous generation, and has likely been raised entirely in the new culture. This generation often has no interest at all in the family business, which can lead to the family business and wealth being lost due to lack of interest. Even if the third generation is interested, there are several forces conspiring together to destroy the wealth of the family.
Through a series of stories in this article, I will discuss the various ways that families and their heirs lose inheritances. Finally, I will discuss how, with proper planning, a family can work together to guarantee, as much as possible, that the family wealth will not be lost.
Bill’s Story: Bill had been in financial difficulty his whole life. He had maxed out his credit cards, was late on his rent, and already had several judgments against him for unpaid bills. His wages at work were being garnished by various creditors. At age 30 years, his prospects were bleak.
Then Bill’s parents died, leaving him everything they owned, including their house. Unfortunately, their property was left outright to Bill. Bill’s creditors took all of the cash, and soon, because Bill had never learned how to handle his finances, he lost the house as well. Forty years of hard work and sacrifice by his parents was gone in less than two years, at the end of which, Bill was still in debt, and had nothing left from his parents. If only someone had been able to take care of Bill’s inheritance for him…
The Story of Ruth: When Ruth’s parents died, they left her a nice inheritance. Unfortunately, four years later, Ruth was in a car accident that incapacitated her, leaving her in a wheelchair. Ruth now needed 24-hour care due to her injuries. Because Ruth had property, she was forced to use her property to pay for her care, including her inheritance from her parents. As a result, not only was her property lost paying for her care, but her inheritance from her parents was lost as well. Ruth is now trying to survive solely on government assistance. She hopes that the government will be there in the future for her, but she is uncertain.
Marisa’s Story: Marisa had been happily married to Jim for ten years, and had two wonderful children. Two years ago, Marisa’s mother Jane died, leaving her home and investments totaling over $800,000. The house was sold and the investments were liquidated, converting everything into cash. When the check arrived from her mother’s lawyer for her inheritance, Marisa put the check into the joint account she held with her husband. Five years later, Marisa died, and everything they owned together, including Marisa’s inheritance, went to Jim. Jim then remarried, started a new family, and left everything to his new wife and new child, with nothing going to Marisa’s children. If only Jane had left Marisa’s inheritance in another way.
John’s Story: John had started his store with high hopes. He had sunk everything he owned into the fixtures, inventory, lease, etc. So, when he ran out of money and his business failed, all of his vendors and other creditors came after him for payment. He was forced to file for personal bankruptcy, facing the fact that he was going to lose almost everything he owned. Unfortunately, his troubles were just beginning. To add insult to injury, one month after he filed for bankruptcy, his father died, leaving him an inheritance of $500,000. Because he was in bankruptcy at the time, the court-appointed bankruptcy trustee seized his inheritance, and used it to pay John’s creditors. When the smoke cleared, John was out of bankruptcy, but there was only $50,000 of his inheritance left. The rest had gone to his creditors. Could something have been done differently by John’s father?
Janet’s Story: Janet’s parents died, leaving her about $500,000 that she promptly invested in a diversified portfolio of stock, bonds, and mutual funds. 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 for kettle corn.
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. The resulting collection efforts by her judgment creditors took nearly everything that Janet 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. He went to live with his aunt and uncle, who were also given control of the property left to Mike by his parents, which totaled over $300,000.
Unfortunately, when Mike turned 18 years of age, he demanded his inheritance from his aunt and uncle, who were obligated by law to turn the $300,000 over to Mike. 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 high school and go on to college or to start a business, at the end of two years, Mike had no money left, and 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 related above 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 Plan can also pass on the child’s inheritance to grandchildren and beyond with the same asset protection as for the child. A Castle Trust Plan is the sensible alternative to leaving an inheritance outright to a child.
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, including special needs children.
Bob gives regular free living trust seminars at his office in San Jose. Visit his website at www.lawbob.com where you can learn more, get on his 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 email@example.com or telephone at (408) 247-0444. All inquiries are confidential.
This article 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 this article. 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.
Attorney Robert P. Bergman, Board Certified Specialist in Estate Planning, Trust and Probate Law, assists families in the San Francisco Bay Area with Estate Planning, Special Needs Planning for children and adults, special planning for retirement plan assets, and trust administration.