Options for Paying Adult Beneficiaries Their Inheritances
They can inherit outright or in stages
Estate planning involves more than just figuring out who will inherit your property when you die. You must also decide how and when these people will receive their inheritances. You have three options for adult beneficiaries. They can inherit outright, they can receive their bequests in stages, or you can create a discretionary lifetime trust.
It can be a very important consideration. Studies have shown that family assets that are handed down only make it beyond the third generation about 10 percent of the time.
Leaving Assets Outright
Giving adult beneficiaries their inheritances in one lump sum is often the simplest way to go. There are no issues of control or access. It's just a matter of timing—when all the decedent's final bills and taxes are paid, including both death taxes and income taxes, the balance of the estate is distributed directly to the beneficiaries.
But there are a few drawbacks to this approach. If a beneficiary is bad with managing money, her inheritance might be gone in no time. If she's in a bad marriage, her inheritance could be lost in a divorce settlement. If she's in a high-risk profession, your bequest to her could be taken in a lawsuit.
The amount of the inheritance you're leaving should be weighed against the beneficiary's age, experience, and family and financial situations.
Leaving Assets in Stages
Another option is to hold an adult beneficiary's inheritance in a trust fund then pay it out in one or more lump sums in stages. He might receive an outright distribution of his inheritance when he reaches a certain age or when he achieves a specific goal.
For example, you could pay a beneficiary 50 percent of his inheritance when he reaches the age of 25, then the balance at age 30. Or you could give him 50 percent when he earns a college degree and the balance when he completes graduate school.
But be careful with these restrictions. You could be opening the door to challenges by beneficiaries if they perceive them as being too strict or unreasonable. For example, you might oppose your offspring's political inclinations or groups she supports, but if you try to prevent any funds from going to these entities, a court might well overturn your wishes. They fly in the face of her constitutional freedoms.
Meanwhile, the property that's held back in the beneficiary's trust fund can be used by the trustee to pay for the beneficiary's college or graduate education, medical bills, a car, housing, or other day-to-day needs. Just keep in mind that when the beneficiary receives a lump sum distribution, you risk the same drawbacks as leaving an entire inheritance outright.
Other drawbacks of using a staggered trust include the added costs of accounting and legal advice during the term of the trust. The trustee will most likely charge a fee as well for services rendered. On average, trusts require use about 1 percent of their assets toward ongoing expenses of operation each year.
Leaving Assets in a Discretionary Lifetime Trust
Your third option is to leave a beneficiary's inheritance in a discretionary trust fund for her entire lifetime.
Assets held in a discretionary lifetime trust or asset protection trust remain protected from divorcing spouses and lawsuits if the trust agreement is written properly. They'll be protected from the beneficiary's potentially bad decisions and outside influences if you appoint a corporate trustee such as a bank or trust company.
You can name the beneficiary as trustee when she reaches a certain age when you think she'll be responsible enough to take full control. Or you can designate a corporate trustee during the entire term of the trust.
You can control who will receive what's left in the discretionary lifetime trust if there's anything left when the beneficiary dies. Meanwhile, the trust can pay directly for the beneficiary's needs...but no more. No lump sums will be at risk.
If the beneficiary already has a sizable estate or if you want to create a lasting family legacy, consider setting up the trust as a dynasty trust. This will avoid estate taxes being paid by the estate of the beneficiary, as well as the estates of the beneficiary's descendants.
All these benefits aside, the drawbacks of using a discretionary lifetime trust are the same as those of using a staggered trust. There will be added costs and expenses for accounting, legal advice, and trustee fees.