Deciding how and when to leave an inheritance to one’s beneficiaries is often fraught with emotion and stress.
Some folks worry about controlling from the grave but also worry that an outright gift with no strings attached will not be good for their beneficiary in the long run.
Some feel a beneficiary should have more guidance or restrictions such that the gift leaves a legacy for generations to come.
How and when to give an inheritance is a matter of personal philosophy, the size of the estate, the abilities and circumstances of your beneficiary, and the legacy you’d like to leave.
Personal philosophy on inheritance
Warren Buffett once famously said, “Leave the children enough so that they can do anything, but not enough that they can do nothing.” And that can certainly work for high-net-worth individuals.
A client of mine recently referred to the political philosophy of providing “a safety net, not a hammock” with respect to her own estate plan — she wanted to leave future generations a safety net for health and other emergencies, but not a hammock in which to become unproductive.
Does this sound like you? Or are you more comfortable leaving what you have to your children (or other beneficiaries) as a final gift with which they can do as they please, no strings attached? Or maybe you’re somewhere in the middle—you’d like to have the gift restricted until the beneficiary reaches a certain age or other milestone? There is no right or wrong answer. This is your gift to give as you please.
What size is your estate?
A trust that continues for many years after the death of the person who created the trust (the Trustor, also called the Trustmaker) can serve many useful purposes, such as centralized management of assets by a Trustee on behalf of your beneficiaries, structured distribution of assets over time, asset protection, maintaining assets as the separate property of a beneficiary, and providing for future generations. But there are also expenses, including legal, accounting, and trustee fees. Does it make economic sense for your assets to remain in trust? There is no hard and fast rule for “how much is enough.” That again depends on your personal goals and who the beneficiaries are.
Who are your beneficiaries?
If a person you intend to leave assets to in your trust is young or perhaps not as responsible as you’d like, and you are concerned that they will not make good choices with the assets they inherit, you do not do them any favors by ignoring your own instincts. Receiving an inheritance is a privilege; it is, quite literally, a gift. You are free to decide the terms of the gift.
This might be the time for a structured trust that has some strings attached but eventually loosens the strings. For example, the beneficiary will receive one-third of their inheritance at age 25, one-half of what remains at age 30, and all of it at age 35.
In the years before the beneficiary receives all of their inheritance, the trustee can be directed to make distributions for the benefit of the beneficiary for “health, education, maintenance, or support” or for whatever reasons you set forth (for example, $X for a first wedding, $Y upon graduating college, $Z toward a down payment on a first home). The idea is that if the beneficiary does make poor decisions initially, there will be a second and even a third chance to manage assets responsibly when the later distributions are made. By attaching some “strings,” you leave a legacy of asset management and prudence.
The larger the inheritance is, the more a staggered distribution schedule makes sense. You don’t necessarily need to leave $50,000 spread out over ten years. Similarly, you wouldn’t want to dump $500,000 on an eighteen-year-old—especially one who just lost their parent(s).
And remember, the funds can still be used for the heir’s benefit; it’s just that a trustee will be deciding when and how that occurs (based on the terms in your trust).
Beneficiaries with special needs
If your beneficiary has special needs and may one day need “needs-based” government assistance, you will want to leave their inheritance in a “special needs trust” so the beneficiary is not disqualified from receiving government benefits. There are restrictions that apply, so please see legal counsel if you have a special needs beneficiary.
Beneficiaries with other issues
A trust with staggered distributions or distributions only for certain reasons (over the beneficiary’s lifetime) should be considered for beneficiaries with substance abuse problems, an inability to handle finances, shaky marriages, excessive spending habits, creditors, or potential creditors.
The trust, with the right trustee, can protect the assets from being spent unwisely, attached by creditors (including ex-spouses), or wasted away. Again, you’re not “controlling from the grave.” You’re giving a gift with the best chance of benefiting your beneficiary for the long run.
Your legacy
For many people, the idea of leaving a legacy includes gifting to future generations. Trusts can be set up to continue for many generations, sometimes with the assets exempt from future estate taxes.
These trusts, of which there are several variations, are sometimes referred to as “dynasty trusts” or, more formally, “generation-skipping transfer tax-exempt” trusts (GSTT-exempt trusts). The terms of the trust need to be carefully considered, as the trust document will be referred to for decades to come. The tax exemption provisions also need to be drafted carefully and abided by.
The “strings” that are attached can provide asset protection and tax planning—your heirs might be very happy you chose to “control from the grave.”
A legacy and not a burden
While leaving assets in trusts for beneficiaries can protect and provide for your beneficiaries, attaching strings to a trust can also result in messy knots if the terms are not clear.
The trust can and should describe when the trustee can make distributions to the beneficiaries—not simply for “health, education, support, and maintenance,” but also what type of education (college, postgraduate, trade school, study abroad programs?). What type of support (must the beneficiary be gainfully employed? Is travel included? Funds for family reunions? Paying for a wedding? A down payment on a home? An entire home purchase?) Is health insurance included in your definition of health? Do you want the trustee to make annual birthday gift distributions to your beneficiaries? Is the trust solely a safety net to make distributions only when the beneficiary has no other assets, or should the trustee be liberal in making distributions?
Stating your goals for the trust is likewise a good idea. Some decisions a trustee makes can benefit one group of beneficiaries over another.
For example, if one beneficiary receives the income from a trust for their lifetime, and another receives the principal at a later date, should the trustee invest for the highest income or for the preservation or growth of the principal? Is the primary beneficiary your spouse? Your children? The oldest generation of descendants? Or is everyone to be treated equally?
The more specific you can be, while also allowing the trustee discretion, the more likely your legacy will be a true gift to your beneficiaries — the strings will look more like a bow on that gift.
Controlling from the grave can seem like a negative. But setting up your beneficiaries for success and independence is not a bad thing. When appropriate and carefully thought out, restrictions on and specific terms for a gift can benefit your heirs and future generations. And that’s quite a legacy.
Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild.” You can reach her at Teresa@trlawgroup.net