A few years back I had a friend that was a CPA. He was a brilliant guy that taught at DePaul in their Masters of Tax Program. He was a little quirky. His personal trademark was “Belt and Suspenders” and yep… he wore both a regular belt at his waist together with bright red suspenders.

When we prepare estate plans, we typically create both Wills and Trusts. The trusts are frequently revocable trusts. They help to organize assets in a manner that is designed to help avoid both Federal and Illinois Estate taxes by assuring that we capture the benefit of both the Federal Credit Shelter Amount ($15 million) but also the lower Illinois Credit Shelter Amount of $4 million. Titling the assets in the name of the trusts helps capture the credits and it avoids probate, a double benefit.

Trusts can also provide some degree of asset protection for subsequent generations. Obviously, a revocable trust will not shield me from my creditors, but it can protect my spouse, my kids and my grandkids from their creditors.

The most common potential creditor is not the victim of an accident that we may be in but rather the future spouse of one of our kids or grandkids. That future spouse (in-law) risks becoming a notorious “outlaw” if they do divorce our child. Any assets that we may have given to our child are at risk if they have been shared during the marriage.

One way to protect the child is to have them enter into a prenuptial agreement before they get married. Talk about difficult conversations…. Try insisting that your child get their intended spouse to sign a prenuptial agreement before the wedding takes place. If both come from families of wealth, it may be an easy task, because they are likely hearing the same suggestions from both sides of the wedding aisle, but if not be prepared to become the hated in-law if you are the only parent suggesting a prenuptial agreement.

I personally prefer the coward’s way out. My recommendation is that you only make outright gifts to your kids of assets or dollar amounts that you do not mind losing. Small gifts that help defray household expenses, education, medical expenses, or even vacations are readily consumed and gone.

Large gifts, however, should be protected. Education gifts should go into 529 Accounts.  If you want to control the selection of the school the account can be held inside of a trust. Large gifts and inheritances should not pass outright, but rather they should go to the kids as trusts. At death, you can leave the assets to your spouse in trust and protect against future spouses and their children sharing in your good fortune, and after the death of both you and your spouse you can leave the assets to each of your children in a separate trust. Assets that they inherit inside of a trust that you create for them at death will generally be non-marital property and be protected in a divorce if they leave the asset inside of the trust. Assets that they remove from the trust and income that they spend on household expenses will risk being lost in a divorce, because they will be converted into shared property. If your kids are emotionally strong and financially responsible, you can let them be the trustee. If they need help saying no to a spouse that may want them to pull assets from the trust, then make them a co-trustee with a sibling.  A trust created and funded by someone else can be protected from in-laws that become out-laws.

If you have a great deal of wealth, then using trusts and insisting on them signing pre-nuptial agreements can be like wearing both a belt and suspenders. One probably does the job but both working together will make sure you don’t get caught with your pants down.