When should a Beneficiary’s inheritance be held in trust?
By Attorney Truman Scarborough
Sometimes it is best to place a beneficiary’s inheritance in a trust to be controlled and managed by a responsible individual. These beneficiary trusts are created either as testamentary trust within a will or as sub-trust within a revocable living trust. Normally, they come into being and are funded at the passing of the person making the gift.
There are various reasons why it might not be wise to have direct distribution to a child. A child could have substance abuse problems or is unable to manage money responsibly and would squander the inheritance. 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. There are “spend thrift” provisions that can be included in the trust to help prevent creditors from reaching the trust assets. For maximum protection, it is best not to have periodic payments but provide that distributions are made at the trustee’s discretion.
When a beneficiary is receiving Supplemental Security Income (SSI), there is a need to place an inheritance in a special kind of trust. If the child 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 benefits.
For a younger beneficiary, placing his/her inheritance in trust can be helpful for two reasons. First, 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 over eighteen) may not have the maturity to handle money wisely.
Although a grandchild may not initially be named as a beneficiary, the grandchild could become a beneficiary if the primary beneficiary dies. Placing a grandchild’s inheritance in a trust allows you to specify how the funds can be used. Distributions could be restricted to certain expenses, like education and health or you could give the trustee discretion on how the funds are used. There can be a single trust for all grandchildren or separate trusts for each grandchild. With a single trust for all the grandchildren, one grandchild would be able to receive a larger share than the other grandchildren if needed.
Normally a trust provides that all remaining funds are distributed outright to the beneficiary when he/she reaches a certain age. However, 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 required to distribute all remaining funds at age 30.
Backup trustees need to be named in case the initial trustee is unable to serve or continue to serve. Rather than naming a backup you could give someone the ability to select a new trustee if needed. A further option would be to nominate a financial institution. However, financial institutions will refuse to act as trustee if the value of the trust assets fall short of their required minimal amount.
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.