I am often asked about the best way to pass their estate to their beneficiaries. As with everything in estate planning, there are many options and no one right answer. Understanding the options and their consequences will help a client determine what is right for them.
The simplest way to pass an asset is through an outright gift. At the client’s death the asset passes directly to the beneficiary, with no strings attached. This option works great when leaving an estate to adults with no health or dependency issues and it is used frequently.
For those with young children, leaving them assets outright is not the best option. Others have beneficiaries who may not be good money managers for any number of reasons. In this situation, leaving the gift in trust may be the best solution. When a gift is left in trust, the Trustee of the trust manages it for that beneficiary. The Trustee may make distributions directly to the beneficiary for “health, education, support, and maintenance” (distributing money to the beneficiary for rent), or the Trustee may make distributions for the beneficiary’s benefit (paying the landlord directly). When holding money in trust for a minor, the trust may provide distributions at certain ages, allowing the child an opportunity to get used to managing large sums of money more gradually. When holding money in trust for someone with money-managing or dependency issues, the decision may be to keep it in trust for their lives, making no outright distributions until their deaths, at which time it might be distributed to their children, or back to their siblings. Of course, when looking at this option, careful thought should be made when determining who the Trustee should be – leaving one sibling in charge of another sibling’s money can cause tremendous pressure on the family, and in order to maintain healthy and loving relationships within the family, it is ideal to discuss other options.
If a beneficiary is receiving government benefits based on need (Medicaid, for example), any gift could put those benefits at risk. In this case, leaving the beneficiary’s share in a Special Needs Trust is often the best option. This can be set up easily within one’s own living trust and is designed to protect the needs-based benefits. This, however, does not come without cost – the Trustee’s ability to make distributions are limited to “special needs” only, as allowed by federal and state laws. If distributions are made incorrectly, the benefits may be lost, so it is extremely important that the Trustee work with an attorney well-versed in administering Special Needs Trusts to ensure the beneficiary gets the most out of the trust while protecting the government benefits.
As you can see, many choices are available. Working with an experienced and caring estate planning attorney can help ensure all options are considered and that the choice being made is done thoughtfully and with full knowledge of what that choice means to your loved ones.