This is the second of a two part series addressing the question of how to make gifts to your beneficiaries. Last time we talked about outright and in trust distributions. In the right circumstances, trusts can enhance the value of the gift and have a lasting and positive impact on the beneficiary and his or her family. Make no mistake about it: trusts are not silver bullets. They are not for everyone. However, as previously discussed, it is important for each of us to consider how we want to make gifts to our beneficiaries. How can this gift be most beneficial to my beneficiary? Below we discuss some common scenarios that frequently lead to the creation of a trust for a beneficiary.
First, the easy choices (really not choices at all)
My Beneficiary is a Minor.
In New Hampshire and Vermont, a trust should be established for minor beneficiary who is likely to receive more than $10,000, otherwise a guardianship will be established for that beneficiary.
While a guardianship of a minor’s estate is a workable “safety net,” it does not provide the flexibility of a trust. For example, a guardianship involves the probate court. This adds another layer of administration that is more often than not unnecessary.
For many, the biggest problem with a guardianship is that it ends when the beneficiary reaches 18 years of age. Receiving what could be large sums of property at that age can be detrimental to the beneficiary. A person’s brain is not fully developed until they have reached 25 years of age, more or less—sometimes older for boys. Relatively large distributions before this can have detrimental effects on the beneficiary.
My Beneficiary has a Physical Disability or Mental Incapacity.
Sometimes a beneficiary receives public benefits based on the beneficiary’s disability and lack of income and resources. We call these benefits “needs based benefits.” If your beneficiary receives receive needs based benefits you will want to consider making his gift in trust so as to protect those benefits.
My Beneficiary has a Serious Addiction
When an addiction leads to destructive behavior, care should be given when structuring the gift to a beneficiary. Will the beneficiary be able to constructively (and safely) manage the gift? Is it reasonably foreseeable that an outright gift would lead to poor choices and harm to the beneficiary or others? If there is a doubt about the addicted beneficiary’s ability to manage the gift on his own, a trust should be considered.
My beneficiary is in pretty good shape, why would I want to create a trust for him or her? A trust may not be appropriate, but we need to think about what would be best for our beneficiaries…
My Beneficiary is in Business for Herself
As any business person knows, owning a business has risks. And many businesses are sole proprietorships—and even where a corporate or limited liability company structure has been created, “co-mingling” of assets or a failure to follow corporate “rules” leads to de facto sole proprietorships and all the business assets as well as the business owner’s own assets are exposed to business risks and failure. In these cases, receiving an inheritance in trust can help protect the inheritance from business risks that are present every day the owner is “open for business.”
My Beneficiary is Married
It’s a sad truth, but the most likely creditor of a married beneficiary is his or her spouse. Divorce rates are high. They are unlikely to go down. Do I want my beneficiary’s share of my estate (whether it is my surviving spouse or a child or other beneficiary) subject to the claims of his or her spouse? Gifting a beneficiary’s inheritance in trust rather than outright can help protect the gift from the claims of the beneficiary’s spouse in the event of divorce.
A story is instructive. After an update meeting several years ago, one of our clients called and reported: “My daughter told me she’s going to leave her husband after her youngest goes to college. The problem is I’m not sure I’ll live that long. I want to protect her share of my estate in case I die before she gets divorced.” Later our client updated his Will to provide trust protections for that child. He left the shares for his other children to be distributed outright. Over the next 3-4 years our client reported little change in his daughter’s intentions. Then, last spring he visited us again. He had a big smile on his face. Chuckling, he said, “My daughter is divorced…and I AM ALIVE!” We shared a laugh and then revised his Will to provide for an outright distribution to his daughter—she didn’t need the protections any more.
My Beneficiary may go Bankrupt
In the aftermath of the “Great Recession” it is all too common for people to lose their jobs and default on debts encumbering assets that have fallen in value. Foreclosures reached new heights in 2009 and 2010. Sometimes “only” the house was lost. Other times the person’s entire savings were threatened or lost and bankruptcy protection was sought. This happened to one of client’s children: the bank was foreclosing on the mortgage encumbering his house, the house was worth less than the debt encumbering it and he filed for bankruptcy. And then our client, his mother died. Unfortunately our client had not updated her plan and the outright distribution to her son that seemed appropriate 8 years earlier had not been adjusted. Helping our client’s other child help settle their mother’s estate we watched her write her brother’s bankruptcy trustee a check for his entire inheritance. A relatively simple change to our client’s plan providing for trust protections for her son would have changed the result: his bankruptcy would have proceeded and he would still have the use and control of the trust property his mother left him. As it was, he received nothing.
My Beneficiary may need Nursing Home Care
While it is relatively difficult to protect one’s own assets from the high cost of nursing home care, it is relatively simple to protect assets you are giving to a child or other beneficiary. Will your beneficiary need nursing home care? If so, how will he or she pay for the care? Do you want to protect the beneficiary’s gift for the beneficiary’s use and later for the use of the beneficiary’s children? If this is important to you then you may want to consider making the gift to that beneficiary in a trust designed to provide for the beneficiary but assure the trust assets are not “counted” if the beneficiary applies for needs based benefits, such as Medicaid, in the future.
My Beneficiary has assets of her own
Where a beneficiary has done well financially making a substantial gift to him or her could exacerbate or cause and estate tax at his or her death. This is especially true where your beneficiary lives in a state that has its own estate tax. Currently states with estate taxes are in the northeast—the only state in that part of the country without an estate tax is New Hampshire. By leaving a beneficiary’s inheritance in properly structured trust, the income and principal will be available to the beneficiary but not includible in his or her estate at death.
An important thing to remember is beneficiaries’ needs are different. Giving careful thought to the best way for your beneficiary to receive his or her inheritance can go a long way toward enhancing the value and meaning of the gift.