If you are a parent, you likely plan to pass down some, or all, of your estate assets to your children upon your death. If your children are still minors they cannot inherit directly from your estate; however, once they are legal adults you can leave assets directly to them within your estate plan. Just because you can though doesn’t mean it’s the best idea. In fact, the Carmel living trust attorneys discuss why you might not want to leave your children a lump sum inheritance in your estate plan.
Gifting in Your Last Will and Testament
Your Last Will and Testament can be used to accomplish the entire distribution of your estate; however, gifts made in your Will are distributed directly to the intended beneficiary without any conditions or controls. Once the gift is made, the beneficiary can do anything he/she wants with the gift. Sometimes, the lack of conditions or continued control is not a problem; however, when gifting to a young beneficiary or a beneficiary with a history of not handling money well, making direct gifts in a Will can be problematic. It is even more problematic if you plan to leave your entire estate to your child(ren) in one lump sum.
Why Is a Lump Sum Problematic?
Gifts made in your Will are made directly to the beneficiary, in one lump sum. and without any conditions about how the assets can be used. No matter how responsible your young adult child may be, handing a 19 or 20 year old a valuable lump-sum inheritance can be problematic. It takes a good deal of trial and error for anyone to learn how to properly manage and invest money. That trial and error usually occurs over a period of time when we are young and don’t have a considerable amount of money to lose. Handing a young adult a large lump sum, however, dramatically increases what he/she stands to lose. Inheriting a lump sum of money also makes your child a target for scam artists and “friends” with less than honorable intentions – and you won’t be around to watch out for your child. All in all, the potential problems that come along with a lump sum inheritance are significant and can be avoided by using an alternate method of distributing your estate, such as a trust.
Is a Trust a Better Option?
A trust is a legal relationship where property is held by one party for the benefit of another party. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Settlor transfers property to a Trustee, appointed by the Settlor. The Trustee holds that property for the trust’s beneficiaries, also named by the Settlor. The overall job of a Trustee is to protect and invest trust assets and to administer the trust terms found in the trust agreement. Trusts all fall into one of two categories – testamentary or living trusts. A testamentary trust is activated by a provision in the Settlor’s Will at the time of death whereas a living trust activates once all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts. Because your Will can always be modified up to the point of your death, a testamentary trust is always revocable.
One of the most attractive benefits of a trust for a parent is the ability to avoid leaving a lump sum inheritance. Moreover, the trust can be used to effectively protect and guard your child’s inheritance while he/she is a minor and then to provide staggered disbursements when your child reaches the age of majority. The terms of the trust, created by you, can be used to direct the distribution of the inheritance in staggered disbursements over as long a period of time as you wish. For example, you could distribute a small “allowance” on a monthly or yearly basis. You could also distribute the assets in smaller lump sums. This is often what parents of a minor child do. The child might receive a lump sum when he/she turns 18, then a larger lump sum at age 21 with consecutively larger lump sums every few years until the trust assets are depleted. Because you control the creation of the trust, you control how the trust assets are gifted to the trust beneficiaries, thereby avoiding a single lump sum gift.
Contact Carmel Living Trust Attorneys
For more information, please download our FREE estate planning worksheet. If you have questions or concerns related to leaving a lump sum inheritance, contact the experienced Carmel living trust attorneys 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.