Protecting Your Children’s Financial Security

Protecting Your Children’s Financial Security

By Craig Watson

Most people who have worked hard all their lives to accumulate assets generally desire those assets to be left to their children in the most beneficial way. However, for some adult children, a large inheritance of assets could be dangerous, both to the children and for the assets. This article summarizes some of the estate planning strategies you can use to protect the assets from the children themselves, their creditors, their spouses, scam artists, and any number of other threats.

We all know families in which adult children encountered problems after they left home. These problems could include addiction to drugs and/or alcohol, fiscal irresponsibility, inability to retain a job, or wages inadequate for long-term saving and moving beyond a hand-to-mouth existence. Additionally, unexpected and catastrophic health problems may arise. You probably know someone who experienced financial stress due to a divorce or overspending, and subsequently getting behind on monthly credit card or car loan payments. And there are some adult children with no current financial problems but through an accident or bad choices find themselves in a resultant crisis.

These are just a few examples of life’s little hand grenades that can ruin the financial future of your children. In reality, every child, no matter how wealthy, is vulnerable to some degree of financial problems. Therefore, in the best interests of children, it is wise for parents to consider asset protection for the assets their children will inherit.

Traditionally, most parents have a Last Will and Testament bequeathing their assets to their children. Once a child inherits these assets, there is very little that can be done to protect the assets from existing or future creditors. The child cannot defeat the interests of an existing creditor by giving the assets away, putting the assets in trust, or any other strategy. In addition, he executor cannot keep the assets in the estate indefinitely if the Will says the assets are to go to the children.

In order to protest against these problems, the parent writing the Will can place very strong protection around the assets they wish to leave to the child. In other words, by leaving assets to a child in trust, the parent can make sure their assets remain protected from the child’s creditors. The parent has a rare “once in a lifetime” opportunity to set up a carefully drafted and irrevocable spendthrift in the Will to forever protect their assets.

A trust is basically a contract in which you appoint a trustee to manage the trust’s assets for the greatest benefit of the trust’s beneficiary. The terms of the trust can provide for how much and how often income and/or principal is distributed to the child and for what purposes. For example, the trust can be drafted to supplement the child’s income with a specific or variable amount of money every month, or on an as-needed basis. The trust can provide distributions for health care, education, support, or general welfare. When the child dies, the trust terms can dictate how the remaining assets are to be distributed to the child’s children, a charity, or another entity chosen by you.

Consequently, assets left to your child in trust are protected from your child’s past, current and future creditors. A well-drafted trust can prevent the trust assets from becoming community property and thereby becoming vulnerable to the trust beneficiary’s spouse in a divorce. It is even possible to allow the child to be trustee of their trust and therefore have control over the assets you leave to him or her. On the other hand, it may be in the best interest of the child for you to appoint someone else to serve as trustee to manage the assets and distribute income or principal to the child as needed. In general, a trust can be established in your Will for your child and customized to your child’s particular situation so that the trust provides the level of asset protection, income protection, asset management, and financial assistance that is in your child’s best interest.

Craig Watson’s legal practice is focused on Estate and Tax Planning, Probate, Guardianships, Elder Law and Corporate Law. Formerly a CPA, he has over 25 years of experience as an attorney. He can be reached by calling 903-813-8500 or at