Often times clients will come in and ask “Do I need a trust?” The answer is, it depends. A less common, but often equally important question is “Should I leave my beneficiary’s inheritance in trust?”
What do I mean by that? Well, when you die your estate plan might leave assets to your beneficiaries outright. This means that they get their distribution and then it’s theirs to do whatever they want with. They could buy a house, or save it, or give it away, or go to the nearest casino. An alternative is to leave a beneficiary’s share in trust. A share held in trust will still be for that beneficiary’s benefit and used for their needs. But, by leaving the inheritance in trust, you can set up restrictions as to what the money can be spent on, designate someone else to manage the assets, or offer the beneficiary themselves some extra protection against creditors.
There are specific types of beneficiaries that it makes particular sense to leave money in trust for. Do any of these sound like your beneficiaries?
Minor Beneficiary
It is very common that clients want to leave money to their children or grandchildren that are minors. Minors cannot manage their own inheritances. If a minor is named as a beneficiary and you don’t leave their share in some sort of trust, a conservator may need to be appointed to manage that minor’s inheritance on their behalf.
If you’re freaking out right now because you think your will leaves money to your 2 year old nephew, it’s probably ok. You probably have a trust provision built into your estate plan without even realizing it. Because it’s so common for people to name minors as beneficiaries, many estate planners (including Fleming & Curti) include blanket provisions that allow for the creation of a generic trust for any beneficiary under a certain age. This normally avoids the need for a conservatorship.
Beneficiary with special needs
The second category of people who often need their inheritance held in trust are beneficiaries who have special needs and receive government benefits. If you have a disabled beneficiary, leaving them an inheritance outright can jeopardize their government benefits. If you leave their inheritance in a special needs trust that inheritance can benefit the beneficiary during their lifetime without jeopardizing their benefits.
Can they set up a special needs trust for themselves after you die? Maybe, sort of, but, there are some disadvantages to doing that. It’s likely best to just leave the inheritance in special needs trust from the get go.
Are you panicking because you think your trust leaves money to your granddaughter receiving SSI? It’s probably ok! Because this is commonly overlooked and the consequences are serious, many estate planners (including Fleming & Curti) include blanket provisions that allow for the creation of a special needs trust for any beneficiary receiving government benefits. Just double check your documents to be safe.
Beneficiary who is bad with money
It’s pretty common that clients come in with a beneficiary in mind who is not financially responsible. They think if they gave the beneficiary one million dollars today, it would be gone by tomorrow. If you leave their money in trust, you can prevent that from happening with their inheritance. By leaving this beneficiary’s inheritance in trust, you can make someone else be responsible for managing your beneficiary’s inheritance. That person can make sure that it lasts longer than a few days.
Beneficiary with a spouse you don’t like
Some clients want to leave their beneficiary with a large inheritance but aren’t a fan of their beneficiary’s partner. This can be tricky. Even if you leave money to your beneficiary in trust it’s hard to be sure that your beneficiary is truly the only one benefiting from the trust assets. If he or she buys a house using trust funds, the spouse will probably still live in it.
Even though the spouse might benefit from the trust, the trust still offers a couple protections for the beneficiary. By leaving money in a trust, there is a clear line of what assets are inherited. If your beneficiary ever gets divorced, a clear demarcation of what’s inherited offers some protection. By having the funds in trust, there may also be less pressure from their partner to put funds into a joint account and comingle them.
By leaving assets in trust, you can also control what happens to trust funds when the beneficiary dies. When the beneficiary dies, you can make sure that the beneficiary doesn’t leave those funds to their spouse. Which leads me too…
Beneficiary who is perfectly fine, but you want to make sure any inheritance that beneficiary doesn’t use eventually gets to someone else
Picture this, you have a spouse who you want to provide for during their lifetime, but you also want to make sure when your spouse dies, anything unused goes to your child from a prior relationship. If you leave your spouse all your assets outright, your spouse can leave them to whoever he wants to on his death. By putting his share in trust, you can control what happens to the assets when he dies too, and make sure that any assets leftover go to your child.
Beneficiary with potential creditors
If your beneficiary is a doctor or lawyer or is in any other profession that gets sued a lot, consider leaving them their share in trust to provide creditor protection. They’ll thank you for it if they get sued!
If you have a beneficiary that fits into any of these categories, consider leaving their share in trust!