Regardless of whether an individual creates a Will or Trust, he/she has the ability to leave an inheritance to an individual either “outright” or “in trust”. First, an outright distribution is the standard “here is your inheritance check” – that is, it is a no-strings-attached inheritance. Second, a distribution “in trust” is when a Trust is created to house an individual’s inheritance. You may be thinking : “Well, why would I, plain ol’ me, need to leave a beneficiary their inheritance in a Trust?” --or— “I don’t want my kid [or beneficiary] to be a Trust Fund Kid!” However, often the reason for leaving an inheritance via a Trust is to protect your beneficiary from himself/herself and from any issues they are currently experiencing … like any of the following:
- Creditors/Bankruptcy. Do you know of someone who has a phone that rings off the hook from bill collectors? If so, it is wise to leave an inheritance to such an individual via a Trust because this will protect their inheritance from either 1) going immediately to the hands of the creditors or 2) getting swallowed up in a bankruptcy proceeding.
- Marital Issues/Divorce. What about an individual who is experiencing marital issues with the possibility of a divorce on the horizon? Again, it is wise to leave an inheritance to such an individual via a Trust because this will protect their inheritance so that 1) their spouse can’t get their hands in the money and 2) it does not get wrapped up in a divorce proceeding.
- Medicaid. Medicaid has specific rules as to “how much” an individual is allowed to have in his/her name – and they have specific rules as to waiving an inheritance. It is best to leave an individual who is receiving a benefit like Medicaid, an inheritance via a Trust. The Trust will, again, allow them to receive an inheritance (without kicking them off) and protect it from Medicaid.
- Addiction. It does not come as a surprise to me that it is not enjoyable to relay the message to your estate planning attorney that there is a beneficiary who struggles with an addiction – any kind of addiction. However, it is important to share this information so that we can properly plan for him/her. A possible solution is to leave an inheritance to them via a Trust, so that the addiction does not get amplified by receiving an outright distribution.
- Age. I don’t know about you, but if I received an inheritance at the ripe age of 18 or 21 (okay, or really any age in my early 20s!), I would likely have spent it as fast I could say the word “mall.” While it sounds silly, you have the option to limit how much and how often a beneficiary receives their inheritance. Consider the possibility that their inheritance is divvied up over the course of their working life – that is, a little at the age of 18, a little at the age of 25, … etc. This can be accomplished via a Trust.
As you can see, just because an individual inherits funds in a Trust does not mean he/she is the infamous “Trust Fund Baby.” In fact, the reasons above are not the only reasons I have seen individuals have Trusts created for their beneficiaries. The point is – every single family is different and sometimes a family’s situation calls for a beneficiary to receive their inheritance in a Trust. It is important to me to extract the “I don’t want my kid [or beneficiary] to be a Trust Fund Kid!” mindset because the most important thing about your estate plan is that your beneficiaries are protected from themselves and others.