Should you leave a distribution to an heir outright or in trust? Jon and I have this discussion with our clients every day. There are numerous issues to be considered. Today we’ll delve into a few.
If the heir is a minor or is incompetent, it’s easy. We provide that distributions to an heir who is incompetent or younger than a certain age, usually between 21 and 28, will be held in trust.
If the heir is an adult, the amount involved is a good starting point. It usually doesn’t make sense to leave a $1,000 bequest in trust, but it likely does if the bequest is $250,000. Who the trustee will be is also important. Corporate trustees are not set up to economically manage small accounts, but a family member or a CPA can likely do so.
The other factors to consider generally fall into two categories. How well will the heir be able to manage the asset? And how concerned are the clients about protecting the distribution from third party claims?
Generally, young adults won’t be good managers of a large inheritance. Most of our clients leave bequests to them in trust, and the question becomes how long the trust should last. It’s worth considering holding large bequests in lifetime trusts. Many clients, however, provide that the trust will terminate when the heir reaches a certain age or the trust has been in existence a certain number of years.
Jon and I are leery about focusing on the heir reaching a certain age. Think lottery winners. No matter how old people are, if they aren’t used to managing a large amount of money, they will almost certainly squander it. However, many clients feel that heirs who are 45 or 50 should be allowed to control their bequest, even if they are likely to blow it through mismanagement.
Clients also decide to leave a bequest in trust to protect it from “creditors and predators.” This might be the heir’s ex-spouse in a divorce, a spouse from a second marriage (and their children), a plaintiff in auto accident litigation, an ex-partner or a business creditor. One of the tools that we can use to accomplish this protection is a “beneficiary-controlled trust.”
Leaving a bequest in trust makes sense in many situations. It’s worth taking the time to carefully consider the options.