LEGAL
Why You May Need More Than a Simple Will
By Michael L. Solomon
When crafting an estate plan, the goal is often straightforward: to ensure your assets pass smoothly to your children.
However, a simple will or joint ownership often leaves your carefully built legacy vulnerable to common yet devastating pitfalls — specifically, the four great threats: divorce, death, lawsuits and poor spending habits.
The story of Mary and her children is a powerful cautionary tale about the inadequacy of basic estate planning.
The Cost of Simplicity
Mary’s wish was simple: split her $1 million estate equally among her four children — Frank, Lisa, Harry and Larry — and ensure the money would benefit her grandchildren later on. Unfortunately, because she used a simple arrangement, her good intentions were thwarted by everyday life. Upon Mary’s death, her will gave everything to her children.
- Frank’s Share: Frank inherited $250,000 and commingled it with his wife’s assets. They eventually divorced and he lost half of his inheritance.
- Lisa’s Share: On Lisa’s death, her assets passed to her husband, Bob. Bob remarried and left the wealth to his new wife. Bob and Mary’s grandchildren received nothing.
- Harry’s Share: Though a respected doctor, his inheritance was jeopardized by a malpractice lawsuit and was potentially exposed to creditors.
- Larry’s Share: Larry squandered his inheritance due to poor money management and personal issues. He had nothing left for his children.
The Solution: The Bloodline Trust
The answer to these common, yet devastating, problems is a Bloodline Trust. This specialized trust is designed to provide robust, multi-generational protection that keeps your wealth within the family.
Here’s how:
Divorce Protection: It holds the assets as separate property, insulating them from a child’s marital estate and potential claims by in-laws during a divorce.
Asset Protection: It includes a “shutoff valve” provision, protecting the assets from a child’s creditors and professional lawsuits.
Spendthrift Protection: For a financially irresponsible person such as Larry, a third-party trustee can be appointed to manage distributions, ensuring the inheritance lasts.
Generational Planning: It guarantees that upon your child’s death, the remaining assets pass directly to your grandchildren or other designated family members, bypassing the child’s spouse (unless otherwise specified).
Advanced Powers of the Bloodline Trust
The effectiveness of a Bloodline Trust is greatly enhanced by including specific, flexible powers that allow the trust to adapt to changing circumstances and maximize financial benefits.
Tax Optimization and Stepped-Up Basis
Including a General Power of Appointment (GPOA) is a sophisticated feature that offers a significant tax advantage. While the trust protects assets, granting a GPOA over the trust assets essentially “pulls” those assets back into the child’s taxable estate which allows the assets to receive a new fair market value tax basis at the child’s death (a “step-up in basis”), eliminating years of capital gains and saving the grandchildren substantial income tax upon sale.
Specialized Distribution Powers
To balance asset protection with beneficiary control, a Bloodline Trust can allow your child to change the ultimate disposition of assets if a grandchild, for example, becomes someone whom your child no longer feels deserves or needs the money.
Michael Solomon is a partner in the law firm of Solomon, Steiner & Peck Ltd., with offices in Mayfield Heights, Independence and Westlake. His areas of practice include estate planning, tax planning and business matters. He may be contacted at 216-765-0123, email [email protected].
