When deciding who you want to inherit your estate after you die, aside from figuring out who will get what, you'll need to determine how and when they'll get it. For adult beneficiaries, there are three options for giving them their inheritance: outright, in stages, or in a lifetime trust.
Leaving Assets Outright
For many people, giving adult beneficiaries their inheritance outright and in one lump sum is the most simple and logical way to go. Why? Because there will be no issues of control or access, just a matter of timing - in other words, once all of the decedent's final bills, and, if necessary, estate taxes, are paid, then what's left over will simply be distributed directly to the beneficiaries. But there are several drawbacks to this approach:
- If the beneficiary is bad with managing money, then their inheritance will be gone in no time.
- If the beneficiary is in a bad marriage, then their inheritance could be lost in a divorce settlement.
- If the beneficiary is in a high risk profession, then their inheritance could be taken in a lawsuit.
- If the beneficiary is already wealthy and has a taxable estate, then their inheritance will only add additional taxes to their own estate tax bill.
Leaving Assets in Stages
Another option is to hold a beneficiary's inheritance in trust and pay the beneficiary one or more lump sums in stages - in other words, when the beneficiary reaches a certain age or achieves a specific goal, then they'll receive an outright distribution of their inheritance.
For example, you could pay a beneficiary 50% of their inheritance when they reach the age of 25 and then the balance at 30, or 50% when they earn a college degree and then the balance when they complete graduate school. Meanwhile, the property held back in the beneficiary's trust could be used by the Trustee to pay for the beneficiary's college or graduate education, medical bills, or housing and other day to day needs. However, once the beneficiary receives a lump sum outright and free of trust, the same drawbacks as leaving an entire inheritance outright will apply. Other drawbacks of using a staggered trust include the added costs of accounting and legal advice during the term of the trust and the fee that the Trustee will be entitled to receive for services rendered while administering the trust.
Thus, when considering the use of a staggered trust, the amount of the inheritance must be weighed against the costs and expenses associated with administering the trust as well as the age, experience, and family and financial situations of the beneficiary.
Leaving Assets in a Lifetime Trust
The final option is to leave a beneficiary's inheritance in trust for their entire lifetime. There are many benefits to choosing this option:
- Assets held in the trust will remain protected from divorcing spouses, lawsuits, and, if a third party Trustee is used, then from the beneficiary's own bad decisions and outside influences.
- If there's anything left in the trust when the beneficiary dies, you can control who will receive what's left.
- If the beneficiary already has a sizable estate, or if you want to create a lasting family legacy, then you can set up the lifetime trust as a generation skipping trust that will avoid estate taxes in the estate of the beneficiary as well as the estates of all of the beneficiary's descendants.
- You can use a third party Trustee while the beneficiary is younger to protect the beneficiary from bad decisions and outside influences but then make the beneficiary their own Trustee at an age when you think that they'll be responsible enough to take full control.