Controlling Distributions Overview
What to know:
- A will alone cannot hold assets after the decedant has passed
- Both a testamentary trust and living trust can hold assets after the decedent has passed
- Trustees, appointed by you (a family member, friend or a professional) manage assets in the trust
- Trusts can set conditions, such as specific ages when beneficiaires receive an inheritance
- Trustees can approve early distributions for reasonable requests
- The trustees controlling distributions can be different than the guardians children
- Special needs beneficiaries need controls so not to disrupt government assistance
A common objective for many families in estate planning is controlling when and how young beneficiaries receive an inheritance.
Families with adult children can plan for distributions to a deceased beneficiary's children.
A family does not need a large portfolio of assets to have an estate worth setting up controls. Parents of young children often purchase inexpensive term life insurance. It is not uncommon for each parent to be insured for $500,000 each, meaning beneficiaries could potentially receive $1,000,000 if both parents pass!
If a child is under age 18, a financial fiduciary is put in place to manage money until the child reaches age 18, at which point the child then receives control of the assets. If you were age 18, what would you do with $25,000 or $100,000?
Parents can utilize a trust to control distributions. A last will & testament, which cannot control distributions by itself because it is not considered a legal entity and hence cannot hold title to any assets, can create what is called a testamentary trust. The testamentary trust is created during the probate process to manage a beneficiary's inheritance. The other common option is a living trust which is created before the decedent's pass, often for the additional purpose of avoiding probate.
Who Controls The Trust?
When creating the language for a testamentary trust or living trust, trustees are selected by those creating the trust. The trustees can be family members, friends or a professional institution.
These trustees have a legal, fiduciary responsibility to follow the trust's instructions. Beneficiaries must be provided with an accounting any time it is requested of the trustee(s). If a beneficiary believes a trustee is acting in a negligent or reckless manner, the trustee may have to appear before a court to justify his or her activities.
A trust can set a variety of benchmarks, such as age or education, prior to a distribution. For example, the trust might state a beneficiary cannot receive his or her inheritance free and clear until he or she reaches age 30. Or the trust might state a beneficiary receives one-half at age 30 and the remainder at 35 to help protect the beneficiary from hastily spending an inheritance.
If a beneficiary or the beneficiary's guardian needs money prior to the ages set in the trust, the trustee often has the authority to grant partial early distribution for reasonable requests in the following areas:
This language is broad and can cover requests covering college tuition, money for a vehicle or for the down payment on a home. Hence, it is important when selecting trustees to pick people who understand your values.
Special Needs Beneficiaries
A beneficiary receiving disability income could have their benefits interrupted if he or she receive an inheritance. Parents with special needs children can incorporate a special needs trust which withholds that beneficiary's inheritance. The inheritance remains in the special needs trust and is not calculated as an asset of person receiving disability income.
The trustees are able to make purchases for the special needs beneficiary and make distributions when needed, but often after careful calculation and review of how it may affect any government assistance.
Other Uses For Controlling Distributions
A trust can control the use of assets for other purposes, such as caring for pets, maintaining a home for dependent children, a spouse in a blended family or for other family members and other goals one wishes to accomplish.
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