When you create your estate plan you will need to make a number of important decisions. Along with deciding who to gift assets to, you will also need to decide how to gift those assets. For example, an Indianapolis estate planning attorney at Frank & Kraft explains how a living trust can help you avoid passing down a lump sum inheritance.
What’s Wrong with a Lump Sum Inheritance?
Most people hope that the inheritance they leave behind for a loved one serves to help protect and provide for the beneficiary. Sometimes, however, simply handing someone a lump sum inheritance doesn’t accomplish the intended goal. Common examples of situations where handing down an inheritance directly to the beneficiary without any safeguards might not be a good idea include when the beneficiary:
- Is a minor. If you are the parent of a minor, your minor child cannot legally inherit directly from your estate. Consequently, someone else must manage and protect the inheritance you leave your child until he/she reaches the age of majority. By then, the inheritance should be worth even more.
- Has a drug/alcohol/gambling problem. You may prefer not to admit it, but if a loved one has an addiction and you hand him/her a lump sum of money, that money will be gone in record time because someone with a drug/alcohol/gambling problem cannot handle money.
- Is a spendthrift. Almost every family has one — that person who simply isn’t good with money. He/she may mean well; however, a lump sum inheritance would likely disappear in record time with very little left to show for it.
- Has special needs. If you wish to leave someone with special needs an inheritance, passing down a lump sum of money could jeopardize his/her eligibility for crucial state and/or federal assistance programs such as Medicaid and SSI.
Why Is a Living Trust a Better Option than a Will?
While it is true that your Last Will and Testament can accomplish the entire distribution of your estate, the gifts you make in your Will are usually distributed directly to the intended beneficiary without any conditions or controls. As a result, the beneficiary can do anything he/she wants with the gift. If you have a problematic beneficiary, that isn’t a wise way to pass down an inheritance. Instead, you may wish to use a living trust to distribute the beneficiary’s inheritance.
What Is a Living Trust?
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.
Avoiding a Lump Sum Inheritance with a Living Trust
A Living trust allows you to avoid leaving a lump sum inheritance. The terms of the trust, created by you, can be used to direct the distribution of the inheritance in staggered disbursements over a long period of time. 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 small 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.
Contact an Indianapolis Estate Planning Attorney
For more information, please download our FREE estate planning worksheet. If you have additional questions relating to the use of a living trust to avoid leaving a lump sum inheritance, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Paul A. Kraft, Estate Planning Attorney
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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