You may have created a living trust to make it easier for your family and loved ones. This type of trust allows your assets to avoid having to go through a costly and time-consuming probate court process upon your passing and is a very effective estate plan.
Depending on when you created your trust, it may hold onto the assets after your passing and until the beneficiaries reach a certain age. If you did this, your beneficiaries were either minors at the time (i.e. under 18 years old) or not financially mature enough to receive the inheritance in their own name. Or, if your beneficiaries were mature enough to receive their inheritance, the trust likely distributed the assets outright. In other words, your trust directed the trustee to liquidate all the assets and issue a check to each beneficiary.
That being said, there a number of different distribution planning options. These are the most common ones and planning issues you could consider:
1. Distribute the assets outright to the beneficiaries. As I mentioned earlier, when a beneficiary is financially mature enough to handle an inheritance, most trusts distribute them outright. The beneficiary can then deposit the distribution check into an existing account and decide whether to spend or invest it. The beneficiary can also incorporate the funds into an estate plan and decide who to leave them to (i.e. the beneficiary’s surviving spouse, children, other loved ones, or charitable organizations). This is a simple and typically effective way of distributing assets under a trust.
2. Hold the assets in trust and name the beneficiary as trustee. While an outright distribution is very simple, it’s not always effective. If a beneficiary deposits the inheritance into an account with a spouse, that co-mingles the funds and make them a marital asset. If the beneficiary later goes through a divorce, the inheritance will then be split equally between the beneficiary and the ex-spouse. Also, if a beneficiary has financial challenges, significant medical expense that are not covered by insurance, or is sued, the inheritance could be reached by creditors. Finally, if a beneficiary is financially successful and receives a meaningful inheritance, that could subject it to a 40% estate tax. Rather than distributing the inheritance outright, the trust could be drafted to hold it back and name the beneficiary as a trustee. This allows the beneficiary to use the inheritance and it provides important protection against divorce, creditors, and estate taxes.
3. Hold the assets in trust and name another person or trust company as trustee. Sometimes it’s not best to distribute the inheritance outright to the beneficiary or keep it in trust for the beneficiary and name that beneficiary as the trustee. A beneficiary may have considerable debts or be at risk for filing bankruptcy. A beneficiary may have addictions and an inheritance will only worsen the situation. A beneficiary may be disabled, and an inheritance would only disqualify the beneficiary from Medicaid or SSI. In these circumstances, a trust can be structured to hold the assets and name another person or a trust company to manage them. In doing so, the assets would be protected from the beneficiary’s financial as well as personal life challenges and losing important governmental benefits.
If you have any questions about this planning and how to distribute the assets of your trust, feel free to contact me at phmulder@cunninghamdalman.com.
Depending on when you created your trust, it may hold onto the assets after your passing and until the beneficiaries reach a certain age. If you did this, your beneficiaries were either minors at the time (i.e. under 18 years old) or not financially mature enough to receive the inheritance in their own name. Or, if your beneficiaries were mature enough to receive their inheritance, the trust likely distributed the assets outright. In other words, your trust directed the trustee to liquidate all the assets and issue a check to each beneficiary.
That being said, there a number of different distribution planning options. These are the most common ones and planning issues you could consider:
1. Distribute the assets outright to the beneficiaries. As I mentioned earlier, when a beneficiary is financially mature enough to handle an inheritance, most trusts distribute them outright. The beneficiary can then deposit the distribution check into an existing account and decide whether to spend or invest it. The beneficiary can also incorporate the funds into an estate plan and decide who to leave them to (i.e. the beneficiary’s surviving spouse, children, other loved ones, or charitable organizations). This is a simple and typically effective way of distributing assets under a trust.
2. Hold the assets in trust and name the beneficiary as trustee. While an outright distribution is very simple, it’s not always effective. If a beneficiary deposits the inheritance into an account with a spouse, that co-mingles the funds and make them a marital asset. If the beneficiary later goes through a divorce, the inheritance will then be split equally between the beneficiary and the ex-spouse. Also, if a beneficiary has financial challenges, significant medical expense that are not covered by insurance, or is sued, the inheritance could be reached by creditors. Finally, if a beneficiary is financially successful and receives a meaningful inheritance, that could subject it to a 40% estate tax. Rather than distributing the inheritance outright, the trust could be drafted to hold it back and name the beneficiary as a trustee. This allows the beneficiary to use the inheritance and it provides important protection against divorce, creditors, and estate taxes.
3. Hold the assets in trust and name another person or trust company as trustee. Sometimes it’s not best to distribute the inheritance outright to the beneficiary or keep it in trust for the beneficiary and name that beneficiary as the trustee. A beneficiary may have considerable debts or be at risk for filing bankruptcy. A beneficiary may have addictions and an inheritance will only worsen the situation. A beneficiary may be disabled, and an inheritance would only disqualify the beneficiary from Medicaid or SSI. In these circumstances, a trust can be structured to hold the assets and name another person or a trust company to manage them. In doing so, the assets would be protected from the beneficiary’s financial as well as personal life challenges and losing important governmental benefits.
If you have any questions about this planning and how to distribute the assets of your trust, feel free to contact me at phmulder@cunninghamdalman.com.
