Estate planning involves more than just knowing who will inherit your assets when you pass away. You also need to decide how and when those individuals will receive their inheritance. You have three options for adult beneficiaries: they can inherit outright, receive their inheritance in stages, or you can create a trust that is available for their lifetime to safeguard their assets.
Leaving Assets Outright
Giving adult beneficiaries their inheritance in a lump sum is often the simplest way to go since there are no issues with control or access. It’s just a matter of timing. The property balance is distributed directly to beneficiaries after paying all the deceased’s bills and taxes.
However, there are some downsides to this approach. A beneficiary’s inheritance may run out quickly if they are not good at managing money. Their inheritance could be lost in a divorce settlement. Your inheritance could be subject to litigation if the beneficiary works in a high-risk profession.
Note: The amount of the inheritance you leave should be weighed against the beneficiary’s age, experience, and financial and family situation.
Leaving Assets in Stages
An alternative option is to hold the adult beneficiary’s inheritance in a trust and then pay it out in one or more distributions over time. The beneficiary may receive a final and direct distribution of their inheritance upon reaching a certain age or achieving a specific goal.
For example, you might give the beneficiary 50% of their inheritance when they turn 25 and then the balance at 30. Or you could give them 50% when they graduate with a bachelor’s degree and the balance when they complete their postgraduate studies.
But be cautious about any restrictions you impose. It might open the door to legal challenges from beneficiaries if they find them too strict or unreasonable. For example, a court might override your wishes if you try to prevent any funds from going to political causes supported by your children. This conflicts with their constitutional freedoms.
Note: Generally, it is not possible to stipulate conditions for inheritances passed in a last will, and the federal beneficiary rule states that “the trust and its terms must be for the benefit of the beneficiaries.”
Meanwhile, the assets held in the beneficiary’s trust can be used for their college or postgraduate education expenses, medical bills, a car, housing, and other daily needs. But remember, you face the same drawbacks of leaving an inheritance outright when the beneficiary receives a distribution in a lump sum.
Other drawbacks of using a staggered trust include additional costs for accounting and legal advice throughout the trust period. The trustee is also likely to charge fees for services provided, which will all eat into the beneficiaries’ inheritance.
Leaving Assets in a Discretionary Trust
The third option is to leave the beneficiary’s inheritance in a discretionary trust for their entire lifetime. This type of trust leaves the distribution of income or property to the discretion of the trustee, although some restrictions may apply.
Assets held in a lifetime trust or asset protection trust remain protected from ex-spouses and lawsuits if the trust agreement is drafted correctly. Your assets will be safeguarded from the beneficiary’s potential poor decisions and outside influences if you appoint a corporate trustee such as a bank or trust company.
Note: You can name the beneficiary as a trustee upon reaching a certain age and if you believe they will be responsible enough to take full control, or you can appoint a corporate trustee for the entire trust period.
You can control who will receive what is left in the discretionary trust if there is anything remaining at the beneficiary’s death. Meanwhile, the trust can pay directly for the beneficiary’s needs… but not beyond that. There will be no large amounts of money at risk.
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Consider setting up a trust as a lasting wealth if the beneficiary already has significant wealth, or if you wish to create a permanent family legacy. This will avoid inheritance taxes that would be paid from the beneficiary’s estate, as well as from the estates of the beneficiary’s grandchildren.
Despite all these benefits, there are drawbacks to using a discretionary trust in the same way as it is used in a graduated trust fund. There will be additional costs and expenses for accounting, legal consultation, and trustee fees.
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Sources:
- Romano & Sumner. “Most Wealthy Families Lose Their Wealth Within Three Generations: How to Avoid this Common Problem.”
- American Bar Association. “Benefit-of-the-Beneficiary Rule.”
- HG.org Legal Resources. “Types of Trusts and Living Trusts.”
Source: https://www.thebalancemoney.com/paying-adult-beneficiaries-an-inheritance-3505440
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