Whether or not we plan to do so, each of us will face death eventually. However, by planning, we can make our passing easier and better in many ways for those we leave behind. This is the second of a series on the ways we can ease the transition through planning. This second article focuses on the importance of the way in which you leave assets to your loved ones. The next article will focus on the importance of communicating your wishes to your family.
When we think of leaving assets to our loved ones, invariably an outright distribution leaps to mind. However, while an outright distribution might be simplest, it is typically not the best manner in which to leave the assets. An outright distribution leaves the distribution vulnerable to many risks, including mismanagement by your loved one, attachment by your loved one’s creditors, division in the event of your loved one’s divorce, and other perils.
These risks and more can be managed by leaving the assets in trust for the benefit of your loved one. If the assets are left in trust for your loved one (i.e., the beneficiary of the trust), they would become trustee only if and when you thought they’d be able to manage the assets. Let’s say you want to benefit your son, Johnny, who is immature and you think he’ll be responsible by age 35. You could leave the assets in trust for Johnny’s benefit and have a trusted friend or loved one manage the assets as trustee of Johnny’s trust until Johnny achieves age 35, at which time Johnny could serve as trustee of his own trust. That way, Johnny would have time to mature and not be able to squander the assets while immature. The trustee could invest the assets and use them prudently for Johnny until Johnny gained maturity.
Let’s say you wanted to protect the assets you leave Johnny from Johnny’s creditors. You could provide creditor protection for those assets if you leave them in a trust. However, the trust would need to have someone other than Johnny as trustee. Further, the trustee of the trust for Johnny’s benefit would have to have complete discretion in making distributions for Johnny because Johnny’s creditors stand in Johnny’s shoes. In other words, if Johnny could force a distribution form the trust, so could his creditors. By leaving the assets in this type of trust, you would provide creditor protection for the assets you leave Johnny in trust.
If Johnny were disabled and had special needs, you could leave assets for his benefit in a special needs trust which would benefit Johnny but wouldn’t deprive him of public or private needs-tested benefits unless the trustee determined doing so was in Johnny’s overall best interests. Someone other than Johnny would need to serve as the trustee.
By planning ahead and leaving the assets you intend to leave your loved ones in trust, you can provide much more bang for the buck. You can provide those you leave behind assets which may be protected from their creditors, which may be free from division in divorce, and which may be safe from their own mismanagement and indiscretions. In other words, by planning ahead, you can do a little of what you’ve done all along for your loved ones: protect them.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
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- Beneficiary Designations and the SECURE Act: Prior Designations - February 23, 2021
- Beneficiary Designations and the SECURE Act: Eligible Designated Beneficiaries - February 16, 2021
