Trusts or Inheritance? Building an Estate Plan That Works for You

Too often, people avoid discussing estate planning at all costs. It’s not until they face a situation that brings the issue to the forefront that they begin to think about what might happen to their assets once they’re gone.

Estate Planning: More Than Final Wishes

Many people equate estate planning discussions with confronting their own mortality. While final wishes are certainly a part of the conversation, estate planning encompasses much more and can, in fact, be a very positive experience. A trusted advisor can guide you through the various decisions you need to make, so you’re well-prepared when it comes time to meet with your estate planning attorney.

Outright Inheritance vs. Trusts: What’s the Best Method?

The overwhelming majority of our clients indicate that they would like to leave their children and/or grandchildren an inheritance. However, they’re often uncertain about the best method of transfer. Is it better to give the inheritance to their heirs outright or leave it in a trust for their benefit?

The Importance of Understanding Your Family Dynamics

It’s important for your financial advisor, tax advisor, and estate planning attorney to understand your full financial picture before recommending a course of action. Though it may be difficult, be prepared to take an objective look at your family situation. Many clients are initially reluctant to share what they deem to be an “embarrassing” or “unusual” family circumstance. This reluctance generally dissipates after some reassurance and the realization that their situation is not all that unusual. Remember, advisors are here to help you, not judge you. We want to help you do what’s best for your hard-earned assets and the futures of your loved ones.

Situations Where Trusts Are Highly Beneficial

There are a myriad of different family scenarios and situations, and more often than not, family dynamics play a large role in determining how best to leave assets to your heirs. Here are a few examples of situations that lend themselves very well to trusts:

• You have minor children.
• You have a blended family.
• Your heirs have blended families, or you want to ensure the funds are not co-mingled with a child’s spouse’s assets.
• This isn’t your first marriage.
• You have heirs who are spendthrifts.
• Your heirs have special needs.
• Your heirs have addictions.
• You want to ensure the inheritance lasts for your grandchildren.
• You want to provide an incentive for your children or grandchildren to be gainfully employed.

A trust is not the only answer, but in each of the aforementioned scenarios, there is a distinct possibility that a large sum of unrestricted funds could either create or exacerbate existing tensions or problems.

Benefits of Leaving Assets in a Trust:

• A trust can offer heirs protection from themselves. Whether the inheritance is intended for minor children or grandchildren, heirs with special needs, heirs with substance abuse problems, or heirs who are spendthrifts, a trust may provide appropriate protection to ensure the funds last for the heir’s lifetime and help prevent premature depletion of the trust assets.
• A trust can offer financial protection. If a trust owns the assets and your heirs do not, it is much more difficult for them to lose the assets in a divorce, a lawsuit, or another legal dispute.
• A trust can discourage laziness or an aversion to work. Leaving your assets in trust can help prevent the sense of entitlement a lump sum may create or further. This can be done in several ways, but often, distributions are doled out over the heir’s lifetime at certain ages or in conjunction with certain milestones.

When an Outright Inheritance Might Be Appropriate

There are times when giving an inheritance to your beneficiaries outright may be the most appropriate way to proceed. However, this approach also requires careful planning. Certain illiquid assets and items of personal property are much easier to leave directly to your beneficiaries rather than in a trust. Additionally, if you have a very stable, financially responsible heir who is already accomplished at managing their financial affairs, it may make sense to leave their inheritance to them outright.

Another consideration is the size of your estate. If your estate is not large enough to warrant the expenses associated with the administration of a trust, you may want to consider another method of handing down assets.

Consider a Lifetime Gifting Plan

To determine whether you should leave an inheritance outright or in trust, you may want to consider arranging a gifting plan during your lifetime. This will allow you to see your loved ones enjoy your gift and offers the added benefit of observing how responsible your beneficiaries are with gifts of cash. This approach may provide valuable information you can use to design your estate plan.

No One-Size-Fits-All Solution

Unfortunately, there is no one-size-fits-all formula that works for every situation. In the end, your wishes, along with your family situation and dynamics, will determine what is best for you and your family. As you embark on the journey of deciding how to pass your assets to your heirs, it is very important to be objective in your analysis of your family dynamics and to consult with your financial advisors.

The Importance of Professional Guidance

You may even want to have a joint meeting with your wealth management advisor, your attorney, and your accountant. Depending on your level of wealth, your decisions may have significant tax implications that you will need help navigating.

Don’t Make the Mistake of Not Having a Plan

The biggest mistake in estate planning is not having a plan at all. Simply starting the conversation is a significant step in the right direction. To ensure the best outcomes, seek advice from professionals, make informed decisions, and commit to reviewing your plan regularly—at least every few years or whenever your life circumstances change.