Deciding who you wish to pass down your assets to is only the first step in estate planning for most people. You may also need to decide how you wish to pass down those assets. This is particularly true if you have a beneficiary to whom you are hesitant to gift a large lump sum inheritance. The Indianapolis trust attorneys at Frank & Kraft explain how to use a living trust to avoid leaving a lump sum inheritance.
Traditional Gifting
For most people, a Last Will and Testament serves as their initial estate planning document. It may also continue to provide the foundation of their estate plan for many years to come. A Will allows you to make both specific and general gifts to as many beneficiaries as you wish to include. The potential problem in using a Will to gift assets is that any assets you intend to gift a beneficiary in your Will must be gifted all at once. Moreover, once those gifts are made, you have no control over how the beneficiary uses the assets. This can be of concern with some beneficiaries. If a beneficiary is a young adult for example, he/she may not yet have the experience necessary to handle a lump sum inheritance. A beneficiary who has a history of addiction can also present a problem if you are passing down a valuable inheritance. Then there is the spendthrift beneficiary. Most families have one – that person who simply is not good with money. In each of these scenarios, you run the risk of an inheritance being squandered if you pass it down using your Will as a lump sum gift. Fortunately, there is another option – using a trust to stagger the inheritance you leave a beneficiary.
What Is a Living Trust?
A trust is a fiduciary legal arrangement that allows a third party, referred to as a Trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. All trusts can be broadly divided into two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s (trust creator) Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts.
Staggering an Inheritance with a Trust
One of the many benefits to using a trust to distribute some, or all, of your estate assets is the ability to stagger the inheritance you leave a loved one. As the Settlor of the trust, you create the trust terms. As long as a term is not illegal, impossible, or unconscionable, you can create any terms you wish. If you are concerned about leaving a lump sum to a beneficiary, you can use those terms to stagger the distribution of that beneficiary’s inheritance. You might distribute a portion right after your death and/or when the beneficiary reaches the age of majority and then increasingly larger portions every few years until the entire inheritance has been distributed. Another option is to distribute small sums on a monthly or yearly basis. In the meantime, the remaining inheritance will be managed and protected by the Trustee you appointed when you created your trust. Finally, if you are concerned about how the beneficiary may use the inheritance you leave behind, you can also use the trust terms to control, to a large extent, how the assets are used. For instance, you might dictate that the assets can only be used for living expenses or for educational expenses. This offers yet another layer of protection against the possibility that the beneficiary will squander the assets you leave behind.
Contact Indianapolis Trust Attorneys
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about using a trust to avoid leaving a lump sum inheritance, contact an experienced Indianapolis trust attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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