When should a Beneficiary’s inheritance be held in trust?

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By Attorney Truman Scarborough


When children have problems like substance abuse or just cannot handle money responsibly, it may not be wise to distribute their inheritance directly to them. For their protection, the gift can be distributed to a sub-trust within the revocable living trust or to a testamentary trust in the will. These trusts normally come into being and are funded after the person who is making the gift has passed away.


If a child has creditor or marital problems his/her inheritance can be placed in trust to protect it in case there is a lawsuit or divorce. When the child can reach an asset, generally the child’s creditors can as well. The trust can contain provisions preventing a creditor from reaching the trust assets. For maximum protection from creditors, the trustee should be given complete discretion on when and how much is distributed to the beneficiary.


If a disabled child is receiving Supplemental Security Income (SSI) and inherits money, the government can claim a right to reimbursement and disqualify the child from future SSI and Medicaid benefits. However, the child’s inheritance can be placed in a “Special Needs Trust” where the child can utilize trust funds without the loss of SSI. Since benefits will be lost if the rules for distribution are violated, care must be taken in selecting the trustee.

Even when a grandchild is not initially named as a beneficiary, the grandchild may become a beneficiary if the grandchild’s parent dies. With a younger beneficiary, there are two reasons why a trust can be helpful. First, in Florida, anyone under eighteen years of age cannot enter into contracts. If not in a trust, funds will need to be managed by a court-appointed guardian or a custodian under the Uniform Transfer to Minors Account. Secondly, even when someone is over eighteen they may not have the maturity to handle the money.


Placing a grandchild’s inheritance in a trust does not prevent the grandchild from using the funds; it gives the grandparent the ability to specify how the funds are used. Distributions may be restricted to certain expenses, like education and health. There can be a single trust for all grandchildren under a certain age or separate trusts for each grandchild. With a single trust, one grandchild would be able to receive more funds than the others from the trust based on need.


Normally a trust provides that all the funds are distributed outright to a grandchild when he/she reaches a certain age. There are variations on ways the final distribution can be structured. For example, if the trustee believes that the grandchild is responsible, the trustee could be given the option to make complete distribution any time after the grandchild reaches 25 years of age. Once the beneficiary reaches age 30, the trustee could be required to make the complete distribution.


Selecting the trustee is very important. If family members are chosen, they should be responsible and caring. When an individual is named as trustee, alternate trustees should be named in case the initial trustee is unable to serve or continue to serve. Another option is to appoint a financial institution. Financial institutions set limitations on the minimal values for the trusts they are willing to administer. Sometimes they require that special provisions regarding their powers and liability be included in the trust.


For further information, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267-4770. Truman Scarborough’s office is located at 239 Harrison Street, in Titusville.

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