The Questions of Estate Planning, Part 5: How

Estate Planning is often misunderstood. People often think it’s only for the really rich, the really old, or both. But the truth is Estate Planning is appropriate for all of us. One of the most frequent points of misunderstanding is that we focus on “who” we want to receive our assets, rather than “how” they should receive them.

For some beneficiaries, an outright distribution might be appropriate. However, ask yourself if one of your beneficiaries might be like the beneficiaries below.

Sam is a Special Needs beneficiary. He is receiving needs-tested public benefits, like SSI and Medicaid. An outright distribution could jeopardize his eligibility for those benefits.

Rick is responsible and is likely to have a taxable estate. If you leave assets outright to Rick, it will compound his estate tax problems. If you simply leave the assets in the right type of trust and allocate your exemption to it, Rick could use the assets for his own health, education, maintenance, and support, and yet they wouldn’t be in his taxable estate at his later death.

Betty is a responsible anesthesiologist. She is very concerned about asset protection. If you leave assets to her outright, they would be unprotected. However, you could leave the assets in a trust for her benefit which provides asset protection. Betty could be the investment trustee. If asset protection is desired, a third party could be the trustee to decide on distributions to Betty.

Matt is immature and not good with money. If you leave the assets to him outright, they are likely to be squandered and possibly in harmful ways. But you could leave the assets in trust for Matt and have a responsible trustee decide what assets should be used for Matt’s benefit.

If you think Matt will never have the maturity to manage his own money, a trustee could manage the money for Matt for his whole life. But, if you think Matt will mature and make better decisions, you could allow Matt to take over as trustee at an age you set, such as 35.

As you can see, there are many situations in which an outright distribution to a beneficiary could do them a disservice. When you are doing Estate Planning, consider not only to whom you want to leave your assets but also how the assets should be left.

Future articles in this series will address other questions about Estate Planning. Below are links to prior articles in this series.

Part 1: Who
Part 2: What
Part 3: When
Part 4: Where

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