Creating or updating your estate plan can be daunting. Key to a successful plan is your ability to answer two major questions: Who will inherit your assets, and how do you want those individuals or charities to receive them?
Methods For Distributing Your Money And Property
Outright
One way to distribute your money and property after your death is to give it outright. This means that once you have passed away and the administration process is complete, your beneficiary will receive their inheritance (such as a bank account, investment account, or real property) with no conditions attached. The inheritance immediately becomes theirs to use as they wish, providing them with maximum freedom and flexibility. They can choose to keep the account or property, spend it, or liquidate it. This type of distribution is also straightforward to include in your estate plan and easy to administer after your passing. When preparing your estate plan, simply name the beneficiaries you want to receive your assets in your trust or will. There is no need for detailed or customized distribution provisions drafted by an attorney.
When the time comes to distribute your money and property after your death, your accounts or properties will be handed over to your chosen beneficiaries after your debts have been settled, any applicable taxes have been paid, and your affairs have been concluded. However, it is important to understand that this simplicity comes with potential risks. If your beneficiary has creditor issues, is going through a divorce, or is not adept at managing money when the distributions are made, the inheritance could quickly be depleted. Moreover, you will almost never want minor children or beneficiaries with special needs to receive their inheritance outright.
In Trust
Whether you choose a will or a revocable living trust as the tool for distributing your money and property after your death, you can include a provision that holds your beneficiary’s inheritance in a separate trust for their benefit. This means your beneficiary will not receive their inheritance outright, but rather when the terms and conditions you set forth are met. Here are some examples of terms and conditions you might establish for your beneficiaries:
- A specified sum or percentage of the trust share when the beneficiary reaches a certain age (for example, one-third of the trust at age 30, half of the remaining trust at 35, and the remainder at 40). This approach allows your beneficiary to gradually access their inheritance. If they make poor choices initially, they have the opportunity to learn from those experiences before receiving additional distributions.
- A specified sum or percentage upon reaching certain milestones (for example, one-third of the trust upon earning a postsecondary degree, trade school certificate, or honorable discharge from the military; half of the remaining trust upon maintaining employment for five years; and the remaining amount upon retirement). This option enables you to set specific achievements for your beneficiary to meet before receiving their inheritance. If they do not meet the first milestone, they can still access their inheritance by completing other milestones. This approach allows you to impart your values to your loved ones. However, it may cause difficulties if your beneficiaries do not meet one or more milestones or need access to the inheritance for legitimate reasons before reaching the milestones.
- For specific events or purchases (for example, an amount equal to the average cost of a wedding in your area, the average cost of a three-bedroom home in your area, or 50 percent of the startup capital needed to form a business once a business plan has been submitted and approved by the trustee.) These provisions allow you to customize the inheritance to support events or experiences you deem important. You can implement these distribution terms alongside many of the other scenarios described here.
- At the trustee’s discretion. Creating a fully discretionary trust means that your beneficiary will receive money from their trust share only if the trustee deems it in the best interest of the beneficiary. While this distribution method may seem very restrictive, it allows the trustee to assess the beneficiary’s situation at the time of the request and adapt to changing needs. Additionally, by not guaranteeing inheritance distributions, any money or property held in the trust is less likely to be accessible to creditors or divorcing spouses. Once the funds or property are given to the beneficiary, they can be taken. This approach allows the trustee to safeguard the legacy you are leaving behind.
- In a special or supplemental needs trust. For individuals who receive or may receive government benefits due to a disability, the structure of their inheritance is crucial. It may be necessary to leave an inheritance to these individuals in a special type of trust that does not disqualify them from receiving government benefits, while still allowing them to benefit from the inheritance. Failing to properly structure the trust could result in your loved one losing their government benefits.
It’s important to proactively create a legally valid plan if you have specific wishes about how your loved ones will receive their inheritance. Our North Kingstown, RI estate planning lawyer can help you with your plan. Without your plan, state law will dictate who receives what, how much they receive, and how they receive it. For example, most state statutes distribute inheritances to adults outright. If you prefer more restrictions on your loved one’s inheritance, your estate plan needs to reflect those wishes. However, including a trust in your estate plan can lead to additional administrative tasks, such as filing income tax returns for the trust, investing and managing trust assets, and preparing inventories and accountings. These tasks require time, and the trustee may charge the trust for their efforts.
Choosing The Right Method
Depending on who your beneficiary is, some options may be more suitable than others. It’s important to understand your beneficiary, their needs, and your desired outcome.
Charity
If you want to leave money or property to a charity, you might choose to give it outright, especially if you have a specific goal or defined purpose for the gift. You may also consider giving the gift outright if you want it used for general charitable purposes, as charities often prefer this flexibility. However, you may choose to incorporate a charitable trust into your estate plan if you have specific tax objectives you wish to achieve.
Minor Child or Other Minor Loved One
It is generally advisable to leave an inheritance for minor children in a trust because minors typically cannot legally own or manage their own accounts or property. With a trust, you can designate who will manage the inheritance, rather than having a judge appoint a guardian or conservator. If the money or property is left outright to the minor, it will likely be held by a guardian, conservator, or custodian until the minor reaches the age of majority (18 or 21, depending on the state). At that point, the inheritance would be distributed to them outright without any restrictions, which could be risky for someone still so young.
Adult Child or Other Adult Loved One
Depending on the adult’s situation and the value of the inheritance you intend to leave, all the options described above may be available to you. However, consider the following important factors when making your decision:
- Is your loved one likely to spend their inheritance immediately?
- Is there a significant possibility that your loved one may get divorced?
- Is your loved one engaged in a high-risk profession (e.g., law, medicine, etc.)?
- Is your loved one receiving or likely to receive government benefits?
If you answered yes to any of these questions, you may not want to leave an inheritance to your loved one outright. A trust with specific terms tailored to your beneficiary’s unique situation may be the best way to ensure the inheritance benefits them without causing problems.
Surviving Spouse
If you are married, you might want everything you own to go directly to your surviving spouse upon your death. Perhaps you view your possessions as jointly owned, wish for a smooth transition, or want to ensure your spouse is well provided for after you pass away. In addition to the considerations we discussed for other adult loved ones, you should also consider the possibility that your spouse may remarry or enter another close relationship and how that might influence your decision. If you leave everything outright to your surviving spouse, they will have the freedom to use the money and property as they wish, including leaving it to a new spouse or buying expensive gifts for a new partner. If this is not your intention, it is important to have a plan that imposes more restrictions on your spouse’s inheritance.
We Are Here To Help
We know that there are a lot of different factors to consider when leaving an inheritance to your loved ones. McCarthy Law, LLC is here to walk you through the different options and help you solidify a plan that honors your wishes and protects your loved ones. If you need to begin the estate planning process or review your existing estate plan, please give our office a call at 401-541-5540.