A Plethora of Planning Options: Different Ways to Leave an Inheritance
As you may expect or know from firsthand experience, estate planning is more involved than deciding who gets what when you pass away. Just as important as deciding who your beneficiaries are is deciding the method or vehicle through which those beneficiaries will receive their inheritance. A myriad of options exist, and this article delves into three common ways to structure an inheritance.
Giving beneficiaries their inheritance outright, in one lump sum, is arguably the easiest approach; after a decedent’s final bills and expenses are paid, assets are divided and distributed to beneficiaries who become legal owners of the assets at that time. This works well if the beneficiaries are mature and fiscally responsible. If beneficiaries are minors, less sophisticated when it comes to financial management or susceptible to undue influence, outright distributions are less desirable.
In Trust, Outright at a Certain Age or Upon Triggering Event
Assets left in trust for the benefit of a beneficiary are held, managed and distributed by a trustee in accordance with the trust’s provisions. Commonly, the provisions of the trust provide that when the beneficiary reaches a certain age, the trustee distributes the assets outright to the beneficiary, and the trust then terminates. Prior to termination, the trustee has the ability to make discretionary distributions to the beneficiary. Trusts of this nature are often found in estate plans of individuals who have minor children. Absent such trust provisions, Wisconsin law provides that assets for the benefit of a minor are held in a custodial account until the beneficiary reaches age 18 or 21. By including provisions in an estate plan that provide that the shares for beneficiaries are held in trust until a certain age – 25 is common – a parent is given some peace of mind that the beneficiary has a few extra years to hopefully mature and become financially independent before the trust assets are distributed outright. The ages for distribution can also be staggered over a number of years with distributions as a set percentage of trust assets. For example, a trust could provide that the beneficiary receives an outright distribution of one-third of a trust’s principal and accumulated income at age 25, one-half of the remaining principal and accumulated income at age 30 and the residue of the trust estate outright at age 35. A trust can also be structured to distribute outright to a beneficiary upon a triggering event, such as graduating from college, instead of when a beneficiary reaches a certain age. Distributions upon a triggering event are less common than distributions at a certain age, and extra care must be taken to address what happens to the trust assets if the triggering event is never achieved.
In Trust, Ongoing
A less common, but modern trend in estate planning, is found in trusts that are maintained for the lifetime of the beneficiary, without any mandatory distributions of principal and income. These trusts, sometimes referred to as dynasty trusts, provide for distributions of principal and income to the beneficiary during the beneficiary’s lifetime. Ongoing, discretionary trusts of this nature were previously viewed as restrictive to the beneficiary and burdensome in terms of continued maintenance and administrative expenses, but a number of benefits have surfaced under the law that make these trusts an appealing planning option for many clients. A key advantage of dynasty trusts is creditor protection; if the beneficiary cannot compel the trustee to make distributions, the assets are not available to creditors. Similarly, assets held in a dynasty trust are not available for division in the event of a beneficiary’s divorce. Inherited assets are not subject to Wisconsin’s marital property laws unless or until those assets become comingled with marital assets. Without a prenuptial agreement or other protections in place, inherited assets are often comingled in relatively short order. In instances where a beneficiary’s inheritance is held in a dynasty trust, the assets are not exposed to comingling and continue to maintain their identity as the individual property of the beneficiary. While the same result can be accomplished through a prenuptial agreement, many beneficiaries are reluctant to execute such an agreement, and many parents prefer to have more control over what happens to trust assets in the event of a beneficiary’s divorce or death. Standard dynasty trust language provides that upon the death of a beneficiary, the assets will continue to be held in trust for the benefit of the beneficiary’s lineal descendants. To ensure that beneficiaries have some independence and oversight, a dynasty trust can provide that a beneficiary can become a co-trustee or the sole trustee of his or her trust share at a certain age.
The best way to structure an inheritance depends on a number of factors, including the age and maturity level of the beneficiary, the size of the inheritance and various family dynamics. Naturally, these variables evolve over time, and as a result, the best method to leave assets to your intended beneficiaries may changes as the years go on. A sound estate plan is one that is tailored to your needs are reviewed on a regular basis.