One of the ways you can “make it last” is to make sure that the inheritance you leave behind is protected from threats like divorce or creditors. You also want to make sure that the inheritance follows the bloodline and goes to your grandkids and not that “no-good son-in-law”. Listen to this week’s show as we discuss how to put those protections in place.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
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Announcer: Welcome to “Make It Last.” Helping you keep your legal ducks in a row and your nest eggs secure with your host, Victor Medina, an estate planning and elder law attorney and certified financial planner.
Victor J. Medina: Everybody welcome back to Make It Last. I’m your host, Victor Medina. I’m so happy you’ve joined us here this Saturday morning if you’re listening live or if you’ve subscribed on our podcast, wherever you are, whenever you’re listening to this show.
I am excited for this show because we’re going to be talking about one of my favorite subject, which is, how can you protect an inheritance when you pass away? Turns out that, most of the time, people come and see me in my day job as an estate planning attorney.
It’s largely to make sure that the inheritance that they leave behind is protected from creditors, from divorce, from other threats like that. We’re going to talk about that in the next couple of segments, in segment two and three.
Before we get there, there actually is some new news that I want to share with you about a new law that has passed. It is one of those modern things that we’ve seen come across in the most archaic area of law [laughs] for different kinds of estate planning. You’ve heard me rant and rave in prior shows about why you’re supposed to have your power of attorney.
Remember, that’s the document that helps you grant somebody the ability to manage your assets. If you become incapacitated, if you can’t manage your stuff, the power of attorney helps that person do that. It’s really important to have one, that’s the first thing. Have a good one. Have one that’s recently signed.
So many people that I encounter come in having signed power of attorney, but it’s from decades ago. It’s not even close to this century. Normally, I ask people, “When’s the last time you’ve updated your estate plan?” If it’s been more than 10 years, that’s still in the 21st century, but it’s been a long time to do that.
These powers of attorney, they’re essential documents because we don’t know when or if we’re going to become incapacitated. We don’t know just what the landscape’s going to be like then. What will we own? What will we need to access? The power of attorney not only should be signed, but it should be regularly updated.
The new law that came in to play is perfect for this whole discussion of where we are today, which is that almost everybody that I meet, from kids to their grandparents, has some form of a social medium account. I have a Facebook account. I have a Twitter account. My son, who’s 13, has three other things that I’ve never heard of.
That’s how he talks to his friends because he’s really not going to talk to…He’s not going to be on the same platform as his dad. There’s just no chance that we can…He can’t stay cool if he’s on the same platform as me. I’ve gone ahead and I snuck on to Instagram, and I got very flattered when he decided to follow me. In addition to following me, he liked some of my photographs.
You don’t know what kind of joy it will bring you to see a little red heart underneath a photograph that you’ve posted that your son has liked. Anyway, he’s got those different social media accounts. There are tons that are out there. In fact, so much of our life is led these days on the Internet. It’s how we have connections with people.
Well, back in the day with a power of attorney, geez, this law that was created who knows long ago and these documents that may have been created who knows how long ago, they didn’t consider this thing called a digital asset.
On September 13th, in New Jersey, Governor Christie signed legislation which is known as the Uniform Fiduciary Access to Digital Assets Act or what we like to call UFidADAA. No, actually I have no idea what we call it. [laughs] New Jersey joined about 23 other states which have already enacted some version of that law.
Basically, the law recognizes a fiduciary’s heir to control digital assets. The fiduciary power also extends to disability. Whether you’ve passed away or you have become incapacitated, there’s a definition for what digital assets are.
They include things like their online bank accounts, their email accounts, their social media accounts, computer files that might be on there. One of the biggest services out there where we hold information is Dropbox.
A lot of people have Dropbox accounts because they’re free and up to two gigabytes of storage, or Evernote. People take a lot of photographs and post things up on Evernote. Well, how do we get access to that stuff if you become incapacitated? Well, without this law that basically orders these companies to allow a properly designated fiduciary to access them, they just wither.
We’re going to cover things like data, and text, and images, and video, and codes, and computer programs, and databases, and currency even. A big thing now is people owning Bitcoin and some of the other digital cryptocurrencies that are out there.
In any event, this law basically allows that. Now, it does restrict the fiduciary’s access to certain kinds of electronic communication like email, text messages unless the person has consented to it in the will, the trust, or power of attorney.
What does that mean? What does all of that jumble together mean? It means you really need to update your estate plan because this law, while it grants access, only does so if the person who is seeking access has some paperwork that says that they’ve granted this authority to somebody else.
If you have old paperwork that doesn’t grant access to digital assets in some fashion, then it doesn’t matter. The power of attorney is not going to be honored there, so we need to update that.
Now, it does cover different kinds of fiduciaries. Fiduciaries, remember, those are the people that stand in your shoes that are supposed to put your best interests ahead of their own. They’re your agents in there. We have fiduciaries in the investment world.
I’m a fiduciary when it comes to handling my client’s information both on a legal side and the financial side, but, in this context, the fiduciary’s really like an executor of your estate, a court‑appointed guardian.
Remember, if you’re listening to me, you have a good power of attorney, and you’re avoiding a guardianship, but lots of people don’t. The court‑appointed guardian, agents under a power of attorney, and trustees and that’s basically the people that are governed under this in terms of the definition of the fiduciaries.
By the way, yes, still have all of the same responsibilities. You don’t get any less responsibility over these assets simply because they’re digital assets. Essentially, what that means is that, if you are going to have control over this stuff, you essentially have to make sure that you are managing them for your principal’s best interest.
That basically doesn’t change anything when you’re talking about money or social media accounts. Whatever it is, you’re responsible, and you’re responsible to that the right way. That just came into law. It actually takes 90 days to take effect. If you become incapacitated between now and 90 days from September 13th, you can’t rely on this law.
After that period of time, it’s been deemed effective. If you have not already, you should review your power of attorney because it may not include provisions for digital assets. Now I’ve been including digital assets provisions for years in the power of attorney form that we have.
I’m going to have to review that now with this new law to make sure I’ve covered everything. You definitely want to update, at minimum, your power of attorney, your trust if you have a trust, your will. You want to make sure the will is clear about access to digital assets.
Victor: Make sure that, all together, you have the right documents that, when you pass away, the people who are going to try to help you after you’re gone have the ability to manage everything, including your super important Instagram account. I make light, but it is important.
Listen, when we come back from the break I’m going to talk to you a little bit about how to protect your inheritance. That’s a really important topic because a lot of people want to make sure that what they leave behind go to the people that they want, the way they want them to have it with their [indecipherable 7:34] .
Join me when we come back on Make It Last, where we help you keep your legal ducks in a row and your nest egg secure. We’ll be right back.
Victor: Welcome back everybody. Today we’re going to talk about asset protection. As I said before, it’s one of those topics that is really at the core of how and why people do their estate planning. When I meet with them, they certainly want to make sure that there is an orderly transition from one generation to the next.
They want to make sure that things are in order, their ducks in a row, and that there are no hiccups along the way. When we get down to the next level, everything’s lined up, what’s important to you?
It turns out that one of the things that’s important to them is to make sure that the stuff that they leave behind is protected. Now, when I do this show, as you long‑time listeners will know, I try to take this second segment and talk about the academics and the theory behind whatever I’m trying to teach today.
Then, in the third segment, I tell you practically about how to get that done. I’m going to take this segment and talk a little bit about asset protection and what it means, how it’s created. Then we’ll end up, in the last segment, talking about how to make sure that you have it in your plan. Now, asset protection has a few elements of it.
One of them is control and the other one is whether it’s accessible by somebody else. There’s two different levers that you have with asset protection. One is your ability to control something and somebody else’s ability to attack it. When you think about asset protection from that context, it’s really difficult for you to create asset protection around your own assets.
If you’re under threat from something on the outside, most of the time it’s too late to do anything with asset protection. We had a call in the office the other [laughs] day, and the person said, “I have to come in and see you this week.” We said, “Why?” He says, “Well, I’m getting sued and I need to protect my assets.” We’re like, click, “Too late, sorry.”
This is something you do beforehand. You can’t protect them after the threat’s already there. It’s already difficult enough to get that done because what we call self‑settled, the ability for you to protect your own assets, that’s really tough. That’s really tough for you to do. It’s much easier for you to protect it when you leave it behind for somebody else.
When you’re protecting it on your own assets, and we’ve done this from time to time for some clients, many times what you have to do is you have to move those assets overseas. It’s one of the reasons why we’ve develop relationships with overseas investment advisers, and why we know a little bit about how to create entities in offshore islands and things like that.
It turns out that that’s one of the ways that you’re able to protect things on your own, but look at all of the headache that you have to go through in order to do that. You literally have to move assets overseas. You have to create these offshore accounts.
We’re not hiding money from taxes, everybody still pays the taxes on it, but we’re making it really super difficult for somebody that wants to bring a claim against our clients to locate these assets, and to have an enforceable judgement against them because of the laws of where these trusts and LLCs are located.
Super hard to do that with your own money. Super easy to do that with the right estate planning when you leave that money behind. When you leave that money behind, you’re able to create terms around who can access it and for what reason. When you think about how to leave something behind, most people leave things behind, what I call outright. That’s a legal term.
They just basically write a check to somebody and that person can deposit that account in there. That is unprotected. You basically just handed them a bag of money. That bag of money can be attacked. That bag of money can be mismanaged, so asset protection can also mean protecting somebody from themselves.
It also can just be attacked from the outside because there’s no walls of protection around it. As many of you know, I’ve written two books. One of the books is on the legal side and we call it, “Make It Last ‑‑ How to Get, and Keep, Your Legal Ducks in a Row.” One of the chapters in there is what we call “Inheritance Castles.”
We think about what we leave behind as having been left inside of a castle that’s created for your kids. These inheritance castles are very, very strong. Rather than handing them a bag of cash, what we did is we created a castle, and the cash is inside the castle.
The home that you’re leaving behind is inside the castle. The castle metaphor holds up pretty well because, as you know, castle is insulated from attack, right? Really thick walls. It means that the assets that are inside of the castle end up being protected because of the structure that’s around that.
The real technical term around an inheritance castle is a sub‑trust, or a form of a trust that’s left behind. We’re creating an entity that has some rules around it. Because the rules say that we can’t move money out of the castle except in certain circumstances, those assets remain protected for the person.
When we set up the castle, we can ask a question, “Should we leave your kids in charge of the castle?” For most of our clients, the answer is yes. It’s OK for us to do that because, in fact, they’re fine to manage them.
Then other times they’ll say, “No, they shouldn’t be held in charge.” Couple of different guideposts for that, like your kids are really young. Probably not super good idea to leave them in charge of the castle when they turn 18. You might want to extend that a little bit further. You might want them to have a companion.
We’ll talk about that on next segment about how to actually set it up. The idea is that, in the planning that you do, you have set some terms on what you’ve left behind. Because you can set basically any terms that you want, you can determine how thick the walls of the castle are, who gets to control it, and the protections are very, very strong.
Those protections not only extend to what you’ve left in one generation, but how those assets pass down in future generations. One of the biggest things that people want to make sure happens in there estate plan is that the money that they leave behind is left for the benefit of their children.
Then when their children are done with it, if their children pass away, and there’s still money left over, they want to make sure that that money goes to their grandkids without any interruption, without any threat.
They’ll say to me, “It’s fine for it to go to my daughter, but I don’t want it to go to my son‑in‑law,” for whatever reason. “I want that to go to my grandkids, and if I don’t have any grandkids, I want it to go to my other children.” We call that bloodline or heritage protection.
What we’re doing is making sure that these assets pass down from the one generation to the next. We can do that in the planning that we create for them because you can basically dictate any terms you want around the assets that you have left behind.
It’s your money. You can choose to leave it to whoever you want. You can choose to leave it to them however you want them to have it. You’ve created these protections, right? Then the question becomes, do they hold up or how do they hold up? Well, in many cases they hold up because of the rules that you have set in place for how money comes out.
If you said, “Look, I wanna leave this behind in this inheritance castle, and I wanna make sure that this stuff is protected,” one of the questions that you’ll have to answer is, “Well, how can money come out?”
If you said that the money can only come out for the health, education, and maintenance of the person who’s the beneficiary of that trust, so, “I’m leaving it behind in an inheritance castle for my daughter.
“The money can only come out for the health, education, and maintenance of my daughter.” That means when there’s an attack from the outside, like a judgement creditor or a divorce, they’re not going to be able to pierce that veil or that shield because it doesn’t meet the test. It doesn’t meet the test for how assets are supposed to come out.
You have to go ahead and structure that the right way. You’re going to have to write the terms so that you have narrowly written out what’s supposed to happen, and it only happens in certain circumstances. There’s some rules whether or not you put your kid in charge of their own trust or if you have somebody on the outside.
You can create stronger protections if you have somebody on the outside managing the terms of how money comes out. We call that a discretionary trust. You can go ahead and say, “Look, I’m leaving this behind, but I’m gonna have a completely separate third party be the person that determines when it comes out at their discretion.”
That’s actually the strongest protection as long as that person is making the decision is not the beneficiary, as long as we’ve separated that out. You can determine how and when that happens. The test comes because the terms that you have set are narrow enough not to cover whatever the judgement is going on, whether the divorce, or the creditor, or whatever else is going on.
Victor: That’s the way those two things work together. When we come back, I will talk to you about how to examine your own estate planning to make sure that you have these protections in place because many of you think you do and you don’t. I’m going to let you know that, and I’m going to tell you how you have to fix it.
[laughs] Stick with us. When we come back on the next segment, I’m going to talk to you about how to examine that and we’re going to fix it, so stick with us. We’ll be right back after the break.
Victor: Welcome back, everybody. We’ve been talking a little bit about asset protection. I can’t tell you how much I love doing this show. I got to get this done for you in 30 minutes. You just got a crash course on asset protection in segment two.
That normally takes three hours when I train CPAs and other advisors on the team, and other lawyers from time to time. You got nine minutes, so I hope you’re paying attention because now we’re going to transition and talk about how to make sure that what you have in place, your estate planning, actually meets some of these asset protection principles.
We’re talking about death planning in this case. We’re going to set aside the concepts of powers of attorney and advanced healthcare directives. They have no place right now. We’re actually going to focus on wills and trusts.
These are protections that in your own lives will actually materialize after you’re gone. I’m so sorry that you put this whole estate plan together. You are never going to see whether or not it’s worked. [laughs] You’ll be gone.
If it’s set up the right way, it will work, and you have to check on these things. There’s two different ways that we can set up these protections. We can set it up from within a will or we can set it up from within a trust.
My clients know which preference that I have, which is, whenever possible, use a trust because a trust has benefits over the will. Those benefits include privacy, the ability to manage the assets when you’re disabled, the ability to make changes without a lot of the pomp and formality that happens around a will.
The other reason is that because the will only becomes effective if you probate it, it’s hard to lose the trust if somebody doesn’t like the terms of it. Think about it a little bit more devious mind.
If there exists a will that creates all these protections and it turns out one of your kids doesn’t like those protections and then conveniently loses the will, they’re still going to get their third if they’re one of three kids, but they don’t have to have a worry about those terms on there. The will only becomes effective if we probate it, so I tend not to like the will.
It doesn’t matter about length. At the end of the say, they’re about the same length in the documents that you have. Whether you have a 40‑page will or a 40‑page trust, it doesn’t make too much of a difference on its effectiveness. I do like the trust better. Again, it’s an immediately effective document, and you get all these privacy benefits.
Now, you have a will that pours into the trust. You have a trust, and it has the asset protection planning. How do we make sure that it actually has the asset protection elements of it? Whether you’re reviewing your will or your trust, you’re going to look at the residuary or dispositive provisions.
Sorry for those two quarter words there, but you’re looking for where you’re leaving stuff to somebody else. If your provisions and your documents basically just say, “I hereby leave this stuff to this person,” and that’s it, you don’t have the asset protection. The asset protection is actually going to create that inheritance castle that I was talking about.
You will go ahead and you will have a language in there that’ll say, “I am going to set aside one‑third of my assets for this person and I want you to create a trust share to be administered this way.”
You’ll say there that all of the income gets paid out, that they have access to principal for their health, education, and maintenance. This is all language that your lawyer’s going to help you with, but it has to have that language in there that basically says, “I’m creating this chair for somebody and I’m putting rules around how to distribute it.”
If all you have is a little line item that says, “I’m gonna leave everything to my kids in equal shares,” and then we’re done, ‑‑ there’s not going to be more rules about it ‑‑ you don’t have asset protection. You didn’t build the inheritance castle. It takes work.
You got to set the blueprints out. You got to get that stuff out there. You want a little bit longer provision, just a little test to make sure that it’s there. In addition to making sure that it is in there as a longer paragraph…I don’t [laughs] know how else to say it.
If you’re not a lawyer, you’re not going to be able to read and understand it, but you can spot whether or not you have it by basically looking at the length of the provisions. You want to make sure that you created these trust shares. Then, inside of there, you want to talk about who’s in charge of it. You want to set a trustee over the share for your kids.
For most people, that’s going to be the kids themselves. Most people have pretty reliable kids. It’s OK for them to manage that. I say to clients all the time, “Is it appropriate that we give this kid a checkbook for his own account? Should we give him the ATM card and the pin number?”
For most families, the answer is going to be, “Yes, it’s totally OK to do.” In some cases, you get somebody who’s a threat to harm themselves with drugs or alcohol, or is a spendthrift and doesn’t know how to manage money.
In some cases, we might give somebody else the authority to manage this money and the distributions of this money. We might hand the checkbook to someone else, but you’re going to want a provision inside of there that not only creates the castle, but talks about who has got the keys to the castle. Who is in charge of it?
We call the person a trustee. By the way, we call him a trustee whether or not you start with a trustee or you start with a will. We call him a trustee in either case, but you want to talk about who’s going to be in charge.
Now, don’t stop there. In addition to naming somebody who’s going to be in charge, you’re going to want to back up to that person that, if they become incapacitated or if they die, that we have a vice president or we have some line of succession for who’s going to be in charge.
Great, we have set up this inheritance castle and we have set somebody up in charge. The next thing we want to talk about is what happens to the assets that are inside the castle. Depending on the size of your estate and the prudent management of these assets, could be that there’s stuff left over after the person dies.
You want talk about what’s supposed to happen to those assets in that instance. You’ll think about, “OK. Well, if there’s any money left over should it go to my own kids? Should it go to their kids? Should it go to a charity?”
You’re going to be able to talk about what happens to this stuff when that person dies if there’s anything leftover. This bloodline protection, heritage protection, basically where you’re talking about where stuff happens afterwards is another element to the creation of this castle.
You’re going to leave the keys to the castle. Then you’d talk about who inherits the castle after that person’s gone. If you have all of these elements and you have the base level ‑‑ the base level ‑‑of asset protection for what you leave behind your kids done correctly, this will protect these assets against their divorce.
If you imagine a scenario where you left behind this inheritance for your daughter and that no good son‑in‑law that you’ve got and they have a divorce, that no good son‑in‑law who hires this big, expensive, fancy divorce attorney is going to go and say, “I want some of my in‑laws inheritance.”
This trust that you’ve created for the benefit of your daughter, it’s going to have rules about how money comes out. The rules are going to say, “First of all, it wasn’t your daughter’s money to begin with, so you don’t get a cut of that. It’s not like it’s a marital asset.”
By the way, there’s some rules about how that money comes out. One of the rules says it doesn’t come out for any judgment creditors. It only comes out for the health, education, and maintenance of your daughter.
Sure, we can use that money to help pay for school, and medical expenses, and get them set up for a home, but, nah, I can’t split that money with you. You’re not a beneficiary of that money. You, the no good son‑in‑law, cannot touch this inheritance, what we leave behind.
I got to tell you folks. That’s the number one reason why we put plans in place. We start talking to people about these asset shields that we can create, these inheritance castles, and it is the number one reason why people want to make sure that their assets are properly protected.
They want to enjoy it in their lifetime. They’re fine with their daughter enjoying it. That it can be their money, so, “Yep, I’m going to leave that behind for my daughter, but my daughter gets divorced or when she dies, I don’t want it to go into my son‑in‑law. I want it to go to my grandkids.
By the way, my grandkids, they might be small, so I don’t want their father to manage that,” so we’re going to determine somebody else who’s going to manage that money and make determinations about when it comes out.
As you can see, these are good protections to have in place. You’re properly setting up what happens to your stuff when you’re gone and making sure that that stuff is saved, and protected, and otherwise insulated from any future attacks. Go examine your estate plan.
You’re going to drop everything that you’re doing and check, and make sure that you have these protections in place if it’s important for you to make sure that the stuff that you leave behind isn’t threatened by some outside attack in the future, like a divorce or a creditor, and that it follows the bloodline. Then consult with your estate plan attorney about making sure that’s done the right way.
All right, so that wraps up the show for today. If you’ve liked what you heard, do me a favor. Go on to iTunes. Search for Make It Last. You’re going to see a little blue box. It’ll say, “Make It Last with Victor Medina.” Click on that and leave a review, a five‑star review, talking about how awesome this radio show is, this podcast.
In that way, Apple will bring it up to the top when people say, “I want to learn more about legal planning and retirement planning, whatever it is,” and people will find this podcast. Share it with your friends. Send them the link.
Tell them to listen to WCTC 1450 AM at 7:30 in the morning on Saturdays, or they can stream it live by going to the website. They can even go to Make It Last Radio. They can play all of the back episodes as well. We’ve got a whole library now. This is show, I think, 25. We’re a quarter of a century old on this. Well, a quarter of something anyway. We got a whole library.
We’re going to continue going. I’m really happy to have our contract extended over at WCTC. We’re going to continue producing this radio show for you. Hope you’re enjoying it. Listen, that’s this topic for this day. We’re going to catch you every Saturday morning.
Victor: I want to thank you for joining us. This has been Make It Last where we help to keep your legal ducks in a row and your financial nest egg secure. Catch you next time.
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