There are assets that I call legacy assets that need a special level of protection that is not difficult to provide. What do I mean by legacy assets? I mean assets that are intended not to be sold and passed through from one generation to the next. Here are some common examples. A family farm or ranch, mineral royalty interests, or a vacation or lake house, or other recreational property. Many acquire these type of assets intended for them to be passed down through the family and used for the family and desire that they never be sold. Mineral interests can be so expensive to transfer from generation to generation, and generally it’s not advisable to sell them, that they have the same character as another legacy asset. There are three fundamental problems with simply passing these assets along in joint ownership to an ever-growing list of beneficiaries.
First, who will control and manage the asset? Second, is the asset subject to being seized by creditors and third, and related to the second, does the asset disqualify the family members from government benefits, in particular Medicaid planning. The issue of control becomes a problem when more and more family members jointly own the legacy asset. In the first generation, the patriarch or matriarch are in control. The second generation, they have two cooperative children, but that’s not always the case. But if you’re lucky enough to have a third or fourth generation, it is also highly likely that you’ll have more and more people, and without planning, all of those people will have to cooperate in any decision on the property. You simply have too many cooks stirring the broth, and some of them won’t ever come to the kitchen. The solution is to create a trust or limited liability company or some other entity that owns the assets and selects who is going to manage the asset and control it so that absentee family members prevent effective management of the asset.
What about creditor protection? If you simply leave the asset to the children, grandchildren and other relatives, any one of those persons who has creditor problems can cause the loss of the entire legacy asset. The creditor can step in the shoes of that beneficiary and require the asset to be sold, defeating the whole purpose of having a legacy asset in the first place. So the solution is for each beneficiary’s share of the asset to be in a trust that has protection from these types of creditor rights. Otherwise, if any member of the family has severe creditor problems or has a misfortune of being in an accident and they’re sued, the lawyers for those creditors or plaintiffs can seek this legacy asset and force it to be sold and liquidated to cash. That is a failure to plan. The third issue is Medicaid planning. If you own a share of an asset, that share that you own is highly likely to disqualify you from Medicaid qualification regardless of whatever planning we do. The beneficiary of a legacy asset can lose the asset to a creditor but can also be disqualified from other government benefits that they would be entitled to except they would have left the asset outright instead of in a properly drafted trust.
So, planning for legacy assets is usually done with a trust or a combination of a limited liability company and a trust that create clear rules on control of the asset, prevents the asset from being sold to pay creditor claims of the individual owners, and prevents the asset from disqualifying the individual owners from Medicaid and other governmental programs.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, specific tax, legal or accounting advice. We can only give specific advice upon consulting directly with you and reviewing your exact situation.
