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The Wealth Advisor
Reconsider Outright Inheritances
How to Protect Your Heirs and Your Legacy from Bad Decisions and Outside Influences

Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance isn't as hard as you might think. - Suze Orman

After working diligently for decades to achieve your financial goals, you understandably want to preserve your gains and leave an enduring legacy to the next generation. For better or for worse, though, your heirs have free will. Even while you’re alive and very much capable of directly communicating with your children, favored charities and others, you might already be uncomfortably familiar with the limits of your influence.


As you contemplate the future, it’s easy to ponder disagreeable scenarios. What if your adult child squanders the business you leave her by getting involved with a dubious partner or burning through cash reserves and taking speculative risks? What if the non-profit that you co-founded mismanages the property that you leave it or runs afoul of legal requirements?

Your carefully outlined plans for passing money to the next generation can be derailed in many ways:


  • A widowed spouse remarries unwisely, or a child is in a troubled marriage  (especially problematic in WA, as a community property state);
  • An unanticipated or unforeseen tax consequence drains the estate;
  • A chronic illness or lengthy nursing home stay disrupts the plan; or

  • An aggressive creditor, fraud, financial mismanagement, or some other unforeseen act undoes your hard work and creates an issue for your family.

The good news is that you are not the first to deal with these potential issues. For centuries, people have wrestled with how to protect and exert control over the next generation. As a result, they and their advisors have developed quite a toolbox.

Staggered Distributions
When an outright distribution is not advisable, the next level is typically a trust through which inheritances are given to heirs upon reaching certain ages, such as one-third at age 21, one-third at age 28, and the remainder at age 35.  Additional creditor protection can be achieved by creating "withdrawal rights" upon reaching the designated age, rather than requiring the distribution.  However, there are times when it is preferable to give the Trustee more discretion by allowing the Trustee to adjust distributions based upon changing circumstances and behaviors.  This brings us to the discretionary lifetime trust.

Discretionary Trust

What is a discretionary trust?

Depending on how it is implemented for your circumstances, this type of trust lets you pass assets along to beneficiaries now or upon your death. As the name implies, you give the trustee discretion over how and when the beneficiaries may access trust assets. Certain uses of the money might be deemed acceptable, whereas other uses will be restricted.

For instance, if your daughter wants to go to medical school, or your son wants seed money to launch a business, then the money is available. However, if your child (or other beneficiary) veers off path or violates the terms and conditions you incorporate into the trust, then the assets are not available. You can also empower the Trustee to proactively help beneficiaries.  For example, if the Trustee notices that your child has become an alcoholic or gambler, the Trustee can deny distributions, and instead use trust funds for rehabilitation.  

The discretionary lifetime trust cordons off the inheritance making it difficult to break down the wall surrounding the property and assets in the trust. Of course, no wall is impenetrable, but this one can be made quite strong.  The Trustee has the power to go inside this wall, according to your explicit and pre-determined wishes, and access the funds. But others are generally kept at bay.

There are other benefits with this type of more aggressive trust, ranging from estate and income tax planning to proactively passing along financial values.

Please give us a call if you would like to explore how we can help you and your family.
Sound Estate Planning, PLLC • 152 3rd Ave. South, Ste. 107 • Edmonds, WA 98020 • (425) 967-7287