Q1: What should your parents do now?
A: Your parents should protect the money and other assets they leave you. They surely don’t want your inheritance to end up with someone who sues you! They should meet with their estate planning attorney to structure your inheritance properly, based on knowledge of your personal and professional situations.
Q2: Why is timing so important?
A: If your parents die and leave you your inheritance outright, it is not protected and you could lose it in a lawsuit.
Q3: Why might their attorney recommend a discretionary trust?
A: A discretionary trust cannot be subject to legal process by regular creditors. If you are a doctor, patients are regular creditors.
Q4: What is a discretionary trust?
A: One type of discretionary trust is used to avoid creditors of the beneficiary. For example, a wealthy parent sets up a trust for his child, a high risk doctor, along with the child’s children and optionally, the child’s spouse. The trust provides discretion for the trustee to distribute or retain the income and principal of the trust as the trustee determines among a class of beneficiaries that is composed of the child, his children, and optionally, the child’s spouse. Since a beneficiary cannot legally force the trustee to make a distribution to himself, a beneficiary’s creditor, who “steps into the shoes” of the beneficiary, cannot either.
Q5: What are the exceptions to a discretionary trust?
A: While a discretionary trust protects a beneficiary’s inheritance against regular creditors, its effectiveness is less clear for “exception creditors” which include a spouse, former spouse, or child who has a court order for support against the beneficiary of a discretionary trust. Although a literal reading of the Florida Statutes provides that support obligations for a spouse, former spouse, or child do not constitute an exception to this rule, there is at least one case that held otherwise.
While some children are reluctant to talk about these matters with their parents, our experience is that parents are open to such discussions when presented properly, especially because they don’t want their money to end up with someone who sues you.
Robert M. Kramer is founding partner of the Kramer Green law firm in Hollywood, Fla. His law practice focuses on estate planning and wealth preservation strategies to maximize tax benefits and minimize creditor’s risk. He earned his Masters of Law in Taxation from the University of Miami, and both his Juris Doctor and Bachelor’s degrees from the University of Florida. He may be reached at rkramer@KramerGreen.com