Your will or trust probably says that you give your assets to your children when you die.  (Whenever I mention “children,” I also mean nieces and nephews, brothers and sisters, or anyone else who will be inheriting your assets.)  The problem with giving property or money directly to your loved ones is that it can be taken away from them by death, divorce or taxes.

Let me give you an example.  Suppose you and your spouse die, and leave an inheritance to your daughter.  Your daughter is married, and has children.  She dies before her husband.  When she dies, everything she owns, including the property she inherited from you, goes to her husband.  Her husband remarries.  Then he dies.  Everything he owns, including the inheritance you left for your daughter, goes to his new wife.  Your own grandchildren get nothing.  Your son-in-law’s new wife, who is a stranger to you, ends up owning the property you worked hard for all your life, and your own grandchildren get none of it!

Here is another example:  divorce.  Suppose you and your spouse die, and leave your property to your daughter.  She puts her husband’s name on the property with her.  They get a divorce.  In the divorce, her husband takes half of the property you gave to your daughter.  Even if your daughter does not put her husband=s name on the property, in a divorce, he may be able to get half of the growth in value.

Here is another way you can unintentionally hurt your children by giving them an inheritance.  Suppose when you and your spouse die, you leave your son an inheritance worth $400,000.  Your son is a hard worker.  He saves money and invests.  He becomes successful.  The years go by.  Your son dies.  When he dies, his estate has to pay estate taxes before his children can inherit his assets.  He is in a 50% estate tax bracket.  The property you gave your son as an inheritance has grown to $600,000 in value.  Therefore, the inheritance you gave your son increases his estate taxes by $300,000 when he dies.  Your grandchildren get only half of the property you left for your son! The IRS gets the other half.

There is a way to avoid the kinds of problems I describe above.  The answer is a special kind of trust called a “generation skipping trust” or “dynasty trust.”  Here is how it works.  When you and your spouse die, the trust does not give your assets directly to your children.  You may have the trust split into separate trusts so that each of your children gets his or her own trust.  Each son or daughter becomes trustee of his or her own trust.  As trustee, they can control their own inherited assets.  Each son or daughter is also beneficiary of his or her own trust.  Anytime they need money, they can take out of the trust any amount of money they need for their own health, education or support.  To get money out of the trust, all they have to do is write a check from the trust account to themselves.  It is that simple.

As Trustees, your children have control of your assets after you die.  As Beneficiaries, your children can use the assets.  Yet, technically, they do not own the assets; the trust does.  Therefore, when your children die, the inheritance you left them does not go to their spouses; it is guaranteed to go to your own grandchildren.  If there is a divorce, the divorcing spouse cannot take away any of the inheritance you left to your own child.  If your son or daughter dies wealthy, there is no estate tax on the assets in the generation skipping trust, no matter how large it may grow!

If your trust is not a generation skipping trust, this is something worth looking into.