One of the main reasons cited for creating an estate plan is to care for loved ones. An estate plan allows you to expressly name beneficiaries to your estate, the methods by which the gifts will be distributed, how the distribution is administered, whether there are any conditions on the gifts, and so forth. Most people want to provide for family members, relatives, or close friends. This post will survey some common options for how you can make the gift.
Outright and free of trust
The most straightforward way to provide for someone is outright and free of trust. Upon your death (or your spouse’s death, or after the second of you to die, etc.), the gift is distributed to the intended beneficiary, and assuming they are above the age of 18, the gift is now owned by them. That’s it. For example, if you leave $40,000 to Person X, then upon your death, Person X receives $40,000 to do whatever they want. It works similarly for percentage or fractional gifts, like 25% of your estate, or 1/3 of your estate. The value is calculated, and when the distribution stage takes place, the beneficiary receives that gift as their own. The limitation to this method of giving is that you relinquish all control over the gift. If the beneficiary was going through some life challenges, like a divorce or a bankruptcy, your gift may end up never reaching the beneficiary at all. Or if they face significant debt, your life’s work may have ended up going straight into the hands of the beneficiary’s creditors.
Sometimes a little nuance is needed. Maybe dropping a large sum of money on someone isn’t the best idea under the circumstances.
In Trust
Leaving a gift in trust for someone can provide a lot of flexibility and oversight. This option creates a trust (a separate trust other than your living trust) naming your beneficiary as the beneficiary of this newly created trust. You also name the Trustee managing the assets held in trust.
These trusts are created after your death. They are sometimes called “beneficiary trusts”, “inheritance trusts”, “FBO trusts” (“for the benefit of”), “GST trusts” (generation skipping transfer), “dynasty trusts”, or “asset protection trusts”. For the most part, all of those terms can be interchangeable. They all describe an irrevocable trust set up for the benefit of someone other than yourself. “Irrevocable trust” means that the beneficiary is not able to change the terms of the trust (unlike your living trust, which is amendable during your life). The two main reasons someone may want to create irrevocable inheritance trusts is to 1) retain some control over the gift; and 2) protect the gift from the beneficiary’s creditors (think: the beneficiary’s ex-spouse in a divorce, a plaintiff in a judgment against the beneficiary, or from a bankruptcy). By keeping an inheritance in trust, the assets in trust will not “count” toward the assets of the individual beneficiary, and remain somewhat shielded from those creditors.
If you want to provide for a minor (a child under the age of 18), then a beneficiary trust is the way to go. You can name someone as Trustee of the trust to manage the gift for the benefit of the minor child, and that person does not need to be the child’s parent or guardian. You can specify when, if at all, the minor beneficiary is able to take over as Trustee of their inheritance.
Similarly, you can provide for someone who is financially immature or has addiction issues. A trust allows you to provide for someone even when they are not fully capable of providing for themselves.
Supplemental Needs Trust
Sometimes a beneficiary is receiving government assistance that is means-tested. For example, many MediCal and SSI/SSA benefits have eligibility requirements pertaining to a recipient’s income or net worth. If your beneficiary receives a lump sum inheritance, it could disrupt those benefits. The beneficiary would then need to use their inheritance for their care in place of the government benefits, and they would likely end up destitute, back on the government benefits. By leaving the inheritance in a supplemental needs trust, the trust can provide for the beneficiary without disrupting their means-tested assistance.
With trusts, you can place conditions on your gifts. For example, a common condition for parents is that their children be educated before receiving their inheritance. However, what may be clear in your head, may be ambiguous to someone carrying out your instructions. What does educated mean? Does the child need to earn a degree? Two year degree or four year degree? Does the institution need to be accredited? Does the institution need to be located in the United States? Can it be an online institution? You get the idea. You can place any condition on your gift that you like. However, an estate plan is only as effective as it is executable. There needs to be as little ambiguity in the trust terms as possible.
When you work with an estate planning professional, they will field all of the available options, discuss your goals, and assist you with matching your options and your goals. And after all that, an estate planning professional will make sure the documents are drafted correctly, with as little ambiguity as possible.
