ABOUT LIVING TRUSTS

 

law offices of merwyn j. miller
191 calle Magdalena, suite 270 • encinitas, San Diego County, ca  92024 • 760-436-8832

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Introduction

The Problem

Long Term Trusts

Introduction: Ron inherited $1.5 million from his parents two years ago. He was an only child. At 25 he thought he thought he was on easy street. After all, he told himself, I’m a college graduate and have a good job as a parts manager at an auto dealership. Things were fine, for about 3 months. Then he invested with Harold. He had known Harold for about a year. Harold was a little bit older and seemed pretty successful as a real estate broker. So when Harold described the land development deal that he had going and that Ron could double his money, Ron was interested. But he knew he shouldn’t put all his eggs in one basket, so he decided to invest $500,000 in the land deal.

His money was pretty safe with Harold, after all, the real estate market had already hit the skids 2 years earlier. So when his girl friend, Wendy, introduced Ron to her friend, Eva, Ron didn’t have his guard up about the investments that Eva was pitching as a stock broker. Ron invested the rest with her.

Two years later the $500,000 and Harold can’t be found. The $1 million Ron invested with Eva is now $300,000. The loss wasn’t all because the companies Ron invested in lost money, a lot of the loss was because Eva kept churning the account to generate more commission for herself.

The Problem: Just so you know, Ron, Harold, Wendy, and Eva are fictional, sort of! They are actually a conglomeration of people and families I have worked with over the years. The point is that it is as difficult, maybe more difficult to hang onto the money than it is to acquire it in the first place. Why? Because at every twist and turn there is someone who wants to get you to invest with them or in their latest plan. And college educated or not, if you haven’t been through the ringer once or twice, you are the mark.

In my experience I have seen this process play out over and over again. In several situations, all of the money was lost. This occurs, possibly, because a child in his 20's and 30's believes he knows it all. Now he inherits what appears to him to be a massive amount of money. Why were his parents so conservative, he thinks, after all, this taking care of money is easy. So he goes out and invests but fails to take into account all of the risks and problems. And then, of course, a few years later it is all gone. Interestingly, as I think back on the situations I have seen, it is almost always a male child who is involved. Although I ‘m sure it happens, I can’t actually recall this ever occurring to a daughter.

Long Term Trusts as the Solution: To avoid this risk, I advise my clients to leave the inheritance to their children, no matter how responsible the child may be, in the form of long term trusts. Obviously, if the amount to be received in the inheritance is small, then this approach is not viable. But if the child or individual children are receiving more than maybe $350,000 (individually, not in the aggregate), I think it makes sense. Long term trusts have so many advantages. Lawsuit protection, divorce protection, and someone else to help manage it. The latter is our focus in this article.

So how do we do this. Often times we will advise that a trust company be the manager for the first five years, then the child can be a co-manager with the trust company for five years, and after that the child can be the sole manager if he or she desires. This process, particularly the middle interval, gives the child the ability to phase in as manager and “learn the ropes” by working with the trust company. In my mind, this is a much better approach than having it all dumped on the child and expect that somehow, someway, he will simply become financially wise, instantaneously.


 

   
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