Why an “I Love You” Will is Not Enough

Illustration by Janet Atkinson

Illustration by Janet Atkinson

By Kevin Ellman CFP ®

If you are like most people, you have the most common type of will, the “I Love You Will.” It says, “I leave all my assets to my spouse, and upon the death of my spouse, our assets go to our lovely children.” This seems straight forward and protective enough, but is it?

This year, the federal exemption for estate taxes is $5,340,000 per person. A married couple can therefore leave up to $10,680,000 to the next generation WITHOUT incurring federal estate taxes. This means that the vast majority of households will have no federal estate taxes to contend with and therefore, many families have chosen to forego sophisticated Estate Planning. They believe, “If we don’t have to worry about taxes, why do we need anything more than a simple will?”

The truth is that taxes are not the only concern you should have and Asset Protection is NOT just for the super wealthy. Strong consideration should be given to protecting your valuable assets. Suppose you have managed to accumulate an estate totaling $3,000,000, consisting of your home, investments, IRAs and life insurance. Let’s examine two of the most common potential pitfalls of failing to protect your assets properly.

    1. Although it is an unpleasant thought, what would happen if your son or daughter were to get married and then, some day, get divorced? It is entirely possible that the assets you spent a lifetime accumulating could end up with your future ex-son or daughter-in-law, or, as we say in the trade, a future “outlaw.”
    2. Another unattractive but realistic scenario is a situation in which a spouse passes away, leaving all of the assets to the surviving spouse. What would happen if the surviving spouse remarries and subsequently dies or gets divorced? Without the proper planning, some or all of the family assets could end up with the new wife or husband, thereby inadvertently disinheriting the children.

If you are anything like the people I speak to at my seminars across the country, your answer to both of these scenarios is probably, “NO WAY DO I WANT THAT TO HAPPEN!” If this is how you feel, then incorporating Asset Protection into your Estate Plan is something to consider. Again, most people think Asset Protection is just for the super wealthy, but that is not true. Almost everyone can benefit from putting a “moat” around their assets to protect them from future “outlaws.”

Let’s review two steps you can take to design a trust that can protect the assets FOR your children, not FROM them:

  1. Consider leaving assets to your spouse in what is called a QTIP (Qualified Terminable Interest Property) trust.
    • In simplest terms, this trust gives your spouse all income generated for the remainder of the spouse’s life and access to principal under certain circumstances. Thereafter, the trust ensures that the assets ultimately go to the children of your marriage and NOT any future ex-spouse.
  2. Consider leaving your assets in an Asset Protection trust for your children forever. This can accomplish two important goals:
    • As with most trusts, you can appoint a “friendly” and “trustworthy” trustee to do the right thing by your kids. In many cases, you can appoint more than one trustee, and you can even have your children be trustees for each other.
    • A second benefit of an Asset Protection Trust is that it may not be necessary to take money out of the trust at all. Most trusts are structured to allow children to receive income and principal at ages 25, 30, and 35. However, what happens if they get divorced at 40? Depending on how they have handled their money, it is entirely possible that the future “outlaw” could end up with half of “your” money. Many folks don’t realize that a trust can own almost anything. You can buy a house, a car, a business or mutual funds in a trust. And, you don’t need to take the money out of the trust in order to invest it. This way the money is safeguarded.Planning ahead can be like having a “moat” around your money, helping to protect it from the claims of ex-spouses, creditors and even taxation.

Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), member FINRA/SIPC. Wealth Preservations Solutions, LLC is a member of PartnersFinancial a platform of NFP Insurance Services, Inc (NFPISI), which is an affiliate of NFPAS. Wealth Preservation Solutions, LLC is not affiliated with NFPAS and NFPISI.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and individual needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Trusts should be drafted by an attorney familiar with such matters in order to take into account income, gift and estate tax laws (including generation skipping transfer tax). Failure to do so could result in adverse tax treatment of trust proceeds. Asset protection plans should be developed and implemented well before problems arise. Due to the fraudulent transfer laws, asset transfers that occur close in proximity to the filing of a lawsuit or bankruptcy can be interpreted by the court as a fraudulent transfer. Proper structuring of these assets is imperative please seek proper legal and tax advice prior to engaging in re-titling/structuring of any assets. Please note that laws are subject to change and can have an impact on your asset protection strategy.

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Article written by Kevin Ellman, CFP ®, CEO
Wealth Preservation Solutions, LLC.

As a financial advisor for over 25 years, Kevin Ellman provides the full array of financial, estate, and retirement planning services to high net-worth business owners, families, executives, and individuals. He has appeared as a financial commentator on CNBC (Morning Call, Portfolio Make-Over, Make Your Money Work, Power Lunch), and on ABC, and has been quoted in Business Week, CBS Market Watch, Fortune Magazine and The Wall Street Journal.

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