Often, clients just want assets distributed outright to their beneficiaries. This can make sense, in some circumstances. However, there are many circumstances in which it may not make sense. Some of these circumstances, the clients can foresee. Some of them, they may not foresee.
- Beneficiary is a minor at time of distribution
- Beneficiary lacks money management skills
- Beneficiary is a spendthrift
- Beneficiary has or may have creditors in the future
- Beneficiary may have a taxable estate at their death (state or federal)
- Beneficiary may get divorced in the future
- Beneficiary has or will have special needs
- Beneficiary is or may be incarcerated in the future
You should discuss these 8 circumstances and see if any of them apply to any of the clients’ beneficiaries. Often, clients don’t think about all the things that might suggest the assets should be left in trust.
Most clients know that if the beneficiary may be sued, that the assets would be better left in trust. However, clients may not know that if the beneficiary might be incarcerated, the assets might be better in trust. Many states charge inmates for their room and board. This can add up quickly. For example, Missouri charges well over $20,000 per year. A 5-year term would incur well over $100,000 in charges. For more information, click here. This is on top of any penalties for the offense itself.
If assets are left in a fully discretionary trust with a third-party trustee, these obligations may be avoided. For some of the other circumstances above, less restrictive trusts might suffice. For example, in order to keep the assets out of the beneficiary’s taxable estate, the beneficiary could even be the trustee, as long as they had an ascertainable standard for distributions.
You are doing your client a service by helping them consider the many possible circumstances which a trust might help.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com
- Beneficiary Designations and the SECURE Act: Prior Designations - February 23, 2021
- Beneficiary Designations and the SECURE Act: Eligible Designated Beneficiaries - February 16, 2021
- Beneficiary Designations and the SECURE Act Basics - February 9, 2021
