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

By Attorney Truman Scarborough

An inheritance does not need to be distributed directly to a beneficiary. It can be placed in a trust where the funds can be managed and controlled by a trustee for the heir’s benefit. These trusts can be created either as testamentary trusts in a will or as sub-trusts within a revocable living trust. Normally, they come into being and are funded after the person making the gift has passed away.  

There are various reasons why it might be wise to not to distribute directly to a beneficiary. A Child could have problems like substance abuse or is just cannot handle money responsibly and would likely squander the inheritance. When 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. If the child can reach an asset, generally the child’s creditors can as well. The child’s trust would contain “spend thrift” provisions preventing a creditor from reaching the trust assets. For maximum protection from creditors, the trustee would need to be given complete discretion on when and how much is distributed to the beneficiary.

Another reason for placing an inheritance in trust is when a disabled child is receiving Supplemental Security Income (SSI). If the child directly receives an inheritance the government can claim a right to reimbursement and disqualify the child from future SSI and Medicaid benefits. However, if the inheritance is placed in a “Special Needs Trust” the child can utilize trust funds for certain purposes without the loss of the SSI benefits. 

For a younger beneficiary, placing his/her inheritance in trust can be helpful for two reasons. First, in Florida if not in a trust, the minor’s funds may need to be managed by a court appointed guardian or the custodian of a Uniform Transfer to Minors Account. Second, a beneficiary even if over eighteen may not have the maturity to handle money wisely.

Although a grandchild may not initially named as a beneficiary, the grandchild could become a beneficiary if the grandchild’s parent dies. Placing a grandchild’s inheritance in a trust does not prevent the grandchild from using the funds. It allows the grandparent to specify how the funds are used. Distributions could 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.

Normally a trust provides that any remaining 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, the trustee could be given the option to distribute as much as he/she deems appropriate any time after the grandchild is 25 years of age but is require to distribute all remaining funds when the beneficiary is 30 years of age.

Selecting the trustee is very important. When an individual is named as trustee, back up 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. However, financial institutions will act as trustee only if the value of the assets meets their minimal requirements.

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.