Posted by: The Life and Legacy Planning Group
Whether you have accumulated a little or a lot of wealth over your lifetime, it is likely that you have some particular thoughts on how you would like those assets to be used by loved ones after your death. Maybe you would like the assets to be used as a down payment on a home, be applied toward college tuition, or fund a dream vacation. Unfortunately, without specific guidance from you, money that is left outright to your loved ones probably won’t be used the way you would like.
There are several reasons not to leave an outright distribution to your loved ones. It is important to most clients to protect a loved one’s inheritance from the claims of a potential divorcing spouse. A trust protects the beneficiary in marriage and divorce. When a distribution is made outright, the beneficiary’s spouse can claim a share of those assets in divorce or separation as marital property. When assets are bequeathed in a trust, they are typically not considered part of the marital estate.
Likewise, a trust for the benefit of a child or other loved one carries with it other protections that that an outright distribution cannot claim. A trust can protect wealth from the beneficiary’s creditors – most states allow for creditors to assert claims only against income and principal the beneficiary is entitled to receive. If the trust you set up for your child calls for fully discretionary distributions, the creditor can only seize the money after it has been distributed to the beneficiary, and the trustee can literally control what is available to the creditor.
Several other, less tangible reasons, exist for leaving an inheritance in trust rather than outright. The first is that you can avoid the inheritance from being distributed as the state directs at your child’s death. If your child has no estate plan, the state of his or her residence at the time of death supplies a “Will” for that child and all distributions will be made subject to those state intestate laws.
If leaving a legacy is important to you, an outright distribution won’t accomplish that goal. An outright distribution at death simply means that your estate becomes your child’s estate at your death. The money will be spent in the same way as your child’s own money, because that’s what it’s become. On the other hand, leaving your estate in trust means that those funds will be set aside in an account with your name on it, and your child, grandchild, or other loved one will always know where that money came from. It’s hard to imagine someone using such a fund to pay their utility bills; it’s much more likely that the money will instead be used for special purposes, or perhaps left to future generations. In other words, you will have left a legacy that may continue for generations simply by giving some thought to the distributions that you make at the time of your death.
Too often, people overlook the benefit of leaving assets in a trust other than those stated above – even for an adult child. When a trust is set up, you can limit annual distributions or give the trustee discretion to determine the distributions. You can have the trustee – or the individual in charge of managing the funds – pay the beneficiaries’ expenses directly to providers instead of distributing money to your loved one. You can also give a trustee the authority to stop distributions and resume them according to your wishes.
Bottom line: while a trust may not be appropriate in every situation, delaying inheritances as opposed to issuing an outright distribution often enhances the inheritance through additional protections and helps ensure that the legacy you worked hard to build can be passed to the next generation.
If you have questions about distributions, trusts or any other estate planning concerns, contact us today.