As you read last week in part one of this series, when legendary TV and radio host, Larry King, died recently, he left a handwritten will, rather than take the time to consult with his attorneys and properly update his estate plan. Given his impending divorce, I’ll bet good money that his actions will likely result in a lengthy court battle between Larry’s seventh wife and his surviving children. Come on, Larry, 7 seven times? That’s a lot of ex’s that will no doubt be behind the scenes rallying the children they birthed with good ole’ Larry to fight for their birthright.
Now, as I am prone to say to my clients, what can you do that would be better for your loved ones? So, let’s look at Larry’s latest debacle and see what he could have done better. Well, he could have had a Lifetime Asset Protection Trust; that would have been much better than a will.
Lifetime Asset Protection Trusts: Airtight Protection for Your Child’s Inheritance
A What? A Lifetime Asset Protection Trust, known as LAPT. A Lifetime Asset Protection Trust is a unique estate planning mechanism specifically designed to protect your children’s inheritance from unfortunate life events, such as divorce, debt, illness, and accidents. This is not your everyday ordinary trust. Let’s see how it is different and how these unique trusts work.
To avoid the court process of probate that’s inherent with a will-based plan, most lawyers will advise you to put the assets you’re leaving your kids in a revocable living trust—and this is the right move. But most living trusts are structured to distribute your assets outright to your children at certain ages or stages, such as one-third at age 25, half the balance at 30, and the rest at 35. Giving outright ownership of the trust assets in this way leaves them at serious risk of being lost or squandered.
A living trust may protects your loved ones’ inheritance as long as the assets are held by the trust. Once the assets are distributed to the beneficiary, all of the protection previously offered by your trust disappears. For example, let’s say Larry’s youngest sons: Chance, 21, and Cannon, 20, both racked up serious debt while in college. If they were to receive one-third of their inheritance at age 25, their creditors could take their money as soon as it’s paid to them; distributed outright to them as then they are the owners, not the trust.
The same thing would be true if Larry’s oldest son, Larry Jr., 58, got divorced soon after receiving his inheritance. His soon-to-be ex-wife would likely claim a right to the funds in the divorce settlement.
In contrast, a Lifetime Asset Protection Trust gives a Trustee of your choice full discretion on whether to make distributions or not. The Trustee has full authority to determine how and when the assets should be released based on the beneficiary’s needs and the circumstances going on in the beneficiary’s life at the time. And you can even choose to make your beneficiary the Trustee of their own trust (with some restrictions) for even more flexibility and control.
For example, if Larry Jr. was in the process of getting divorced or in the middle of a lawsuit, the Trustee could refuse to distribute any funds. Therefore, the Trust assets would remain shielded from his future ex-wife or a potential judgment creditor should Larry Jr. be ordered to pay damages resulting from a lawsuit.
And because the Trustee controls access to the inheritance, those assets are not only protected from outside threats like ex-spouses and creditors but also from your child’s own poor judgment. For example, if Chance ever develops a substance abuse or gambling problem, the Trustee could withhold distributions until he receives the appropriate treatment.
What’s more, you can write up guidelines to the Trustee, providing them with clear directions about how you’d like the trust assets to be used for your beneficiaries. This ensures the Trustee is aware of your values and wishes when making distributions, rather than simply guessing what you would’ve wanted, which often leads to problems down the road.
In addition to airtight asset protection, a Lifetime Asset Protection Trust can also be set up to give your child hands-on experience managing financial matters, like investing, running a business, and charitable giving.
Although a Lifetime Asset Protection Trust would have been a great way for Larry to protect and pass on his assets to his children, such trusts aren’t for everyone. That said, contrary to what you might think, Lifetime Asset Protection Trusts are not just for the super wealthy.
Indeed, these protective trusts are even more useful if you’re leaving a relatively modest inheritance. The smaller the inheritance, the more at risk it is of getting wiped out by a single unfortunate event like a medical emergency or lawsuit. However, if your kids are going to spend the vast majority of their inheritance on everyday expenses and consumables, such trusts probably don’t make much sense.
Two of Larry’s Children Died Shortly Before Larry
Another factor complicating Larry’s estate is the fact that two of his children died just a few months before he did. His son Andy King, 65, unexpectedly passed away of a heart attack in late July 2020. His daughter Chaia King, 51, died just three weeks later in August from lung cancer.
Larry didn’t update his estate plan to account for their deaths. His handwritten will, created in October 2019, states that in the event of his death, “I want 100% of my funds to be divided equally among my children Andy, Chaia, Larry Jr., Chance, and Cannon.”
Had Larry worked with estate planning lawyers to keep his plan updated, rather than creating a handwritten will, his estate plan would have been immediately updated to account for the death of any of his children. Provisions to address the potential for one (or more) of his beneficiaries dying before him would have been drafted into his estate planning documents. His plan would have made it clear that the distribution would go to the appropriate person or persons; Larry’s grandchildren, the children of his son, Andy King, and his daughter, Chaia King.
As always, we need to look at what we can learn from Larry’s debacle. So, here’s the lesson.
Lesson: Review your plan annually to make sure it’s up to date, and immediately modify your plan following events like births, deaths, divorce, or inheritances.
As Larry’s case shows, your plan won’t do you any good if it’s not regularly updated. Estate planning is not a one-and-done type of deal; your plan must continuously evolve to keep pace with changes in your family structure, the changes in the law, your assets, and your life goals.
Unfortunately, this kind of thing happens all the time. In fact, outside of not creating any estate plan at all, one of the most common planning mistakes we encounter is when we get called by the loved ones of someone who has become incapacitated or died with a plan that no longer works because it hasn’t been updated. Yet, by the time they contact us, it’s too late to do anything, and we are left with damage control.
We recommend reviewing your plan annually to keep it current. Update it immediately following major life events like births, deaths, divorce, and inheritances. We have built-in systems and processes to ensure your plan is always up to date, so you won’t need to worry about forgetting anything.
If you’ve yet to create a plan, have DIY documents you aren’t sure about, or have a plan that hasn’t been reviewed in more than a year, meet with us. We can ensure that your plan stays 100% current, so it works exactly as intended no matter what.
Big Take Away? Don’t Do It Yourself.
No doubt about, it Larry King was a brilliant man. As Larry King’s story demonstrates, do-it-yourself planning can have terrible consequences for your loved ones. To ensure your plan works exactly as intended, contact us to review and update your current plan, or create one if you have yet to do so. We know what it takes to design an estate plan that will keep your family out of court or conflict no matter what happens. Contact us today to learn more.