- March 21, 2021
- Posted by: Michael Gunning
- Category: Wills & Trusts
Proper estate planning requires a bit more than just figuring out who receives your property when you pass away. It would likely be best if you could decide how and when these people would obtain their inheritances. In most states, you will have several options for leaving an inheritance to an adult beneficiary: They can inherit outright, they can receive bequeathed items in phases, or you can create a discretionary lifetime trust to hold the assets.
This situation can become a significant issue. By some accounts, up to 70% of families have lost much of their accumulated wealth by the second generation. According to law firm Romano & Sumner, this number has been shown to jump to 90% by the third generation.
Choose to Leave Your Assets Outright
You can give an adult beneficiary an inheritance in one lump sum, and this is often considered the easiest method to go with because you minimize considerations such as control and access. What matters most is the timing. Any balance held by the estate will be allocated evenly to the named beneficiaries once the decedent’s remaining financial obligations and final taxes are resolved.
It’s important to note that there are some disadvantages to going “the easy route”. Any beneficiary’s inheritance can be spent away very quickly if the person doesn’t know how to manage their own finances. This is becoming a more common concern for many parents these days. You may have heard accounts of inheritances that have been lost to messy divorce settlements. Perhaps worst of all, bequeathed items could even be taken by a lawsuit if a person finds themselves working in a high-risk job.
One good rule of thumb is to always weigh the amount you are leaving to anyone against an adult beneficiary’s financial sense, personal experience, and general responsibility.
You Can Also Decide to Leave Assets in Stages
One common option for those who fear the worst of a specific beneficiary is to keep that adult beneficiary’s inheritance held securely inside a trust fund until you feel the person is ready to have it. You can choose to pay these funds out in a single sum, or several lump sums over time. In this way, a beneficiary could be given a final, outright distribution of that inheritance once they reach a certain age or when they achieve a financial milestone that you decide ahead of time.
As an example, you could create a plan to pay your beneficiary half of their inheritance money once they reach the age of 25 and pay the remaining amount at age 30. Another option might provide them the first portion when they complete the first portion of their college education and give them the remainder when they finish graduate school.
Always be careful with any restrictions you choose to impose. You can open yourself up to future legal challenges by a beneficiary if that person sees them as being overly strict or otherwise unwarranted. There have been cases where a court has overturned a decedent’s wishes because they tried to prevent the inherited funds from being given to political organizations that that person’s child supported. This flies in the face of a beneficiary’s rights and constitutional freedom.
It generally won’t be possible to set conditions on inheritances you want to pass in your last will and testament. There is a federal Benefit-of-the-Beneficiary Rule which states that a “trust and its terms must be for the benefit of its beneficiaries.”
You should also be aware that any assets which are held inside a beneficiary’s trust fund are subject to use by a trustee to help pay for the cost of a beneficiary’s college education, medical expenses, transportation, housing, and many other day-to-day needs. It’s a good idea to consider that you may face similar downsides when leaving an entire inheritance outright as when the beneficiary receives a lump-sum distribution.
However, there are a few more downsides of using a “staggered trust” which could include costs for accounting purposes or other legal guidance used for the trust. A trustee is also likely to charge a fee for services rendered, so you can see how all these things can add up quickly and deplete a beneficiaries’ inheritance.
Leave Your Assets in a Discretionary Trust
The last option we’ll cover is to have an adult beneficiary’s inheritance held within a discretionary trust fund for their whole life. This trust type allows the trustee to distribute income or property from the trust as they see fit, though many states impose additional restrictions.
Any assets kept in this kind of discretionary lifetime trust or an asset protection trust should remain protected from divorcing spouses as well as lawsuits if your trust agreement is created properly. This way your assets can be kept safe from an adult beneficiary’s potentially bad financial choices or even outside influences. You can also appoint a corporate trustee such as a bank representative or trust organization to handle things from start to finish if you think this would be a better fit for you.
It is possible to name a beneficiary as trustee once they reach a specific age if you think they’ll be accountable enough to take complete control of their finances at some point, or you can simply choose a corporate trustee to manage the funds for the entire term of your trust.
You also retain power over who will be given the remaining balance of a discretionary lifetime trust (if anything is left) when the beneficiary dies. Your trust can be set up to pay the entirety of the beneficiary’s needs but also ensure there are no excesses.
Even with all these benefits, there are some standard disadvantages to going with a discretionary lifetime trust which is about the same as those you’d encounter using a staggered trust. These downsides would be the added costs and additional expenses you would pay for accounting services, legal guidance, and paying the trustee.
If you’re unsure about what type of trust is right for you or your family, please contact our office at 509-328-2150 to schedule a consultation or use our contact page to send us a message. Washington State offers a wealth of information pertaining to trusts on the government website found here.