If you are fortunate enough to have amassed a decent sized estate over the course of your lifetime, you may plan to pass some, or all, of that estate down to your children and/or other loved ones. The conventional method used to pass down assets is gifting them through a Last Will and Testament. What happens, however, if you are concerned about handing a beneficiary a sizeable inheritance all at one time? The Lincolnshire trust lawyers at Hedeker Law, Ltd. explain how using a revocable living trust allows you to avoid passing down a lump sum inheritance.
Why Would a Lump Sum Be a Problem?
There are a number of reasons why leaving a loved one a lump sum inheritance might not be desirable, including:
- The beneficiary is a minor. A minor cannot inherit directly from your estate. Consequently, someone else must manage and protect the inheritance you leave a minor until the beneficiary reaches the age of majority. By then, the inheritance should be worth even more. Handing an 18 year old a large inheritance is never a good idea, no matter how mature the individual is.
- The beneficiary has a drug/alcohol/gambling problem. You may prefer not to admit it, but if a loved one has an addiction and you hand him/her a lump sum of money, that money will be gone in record time.
- The beneficiary is a spendthrift. Another potential problem is the family spendthrift. Almost every family has one — that person who simply isn’t good with money. He/she may mean well; however, a lump sum inheritance would likely disappear in record time with very little left to show for it.
The Problem With Wills
Your Last Will and Testament can accomplish the entire distribution of your estate; however, gifts made in your Will are distributed directly to the intended beneficiary without any conditions or controls. Once the gift is made, the beneficiary can do anything he/she wants with the gift. When considering gifts to a problematic beneficiary, the best way to avoid leaving a lump sum inheritance is to use a trust.
What Is a Trust?
A trust is a legal relationship where property is held by one party for the benefit of another party. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Settlor transfers property to a Trustee, appointed by the Settlor. The Trustee holds that property for the trust’s beneficiaries, also named by the Settlor. The overall job of a Trustee is to protect and invest trust assets and to administer the trust terms found in the trust agreement. Trusts all fall into one of two categories – testamentary or living trusts. A testamentary trust is activated by a provision in the Settlor’s Will at the time of death whereas a living trust activates once all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts. Because your Will can always be modified up to the point of your death, a testamentary trust is always revocable.
Using a Trust to Stagger an Inheritance
One reason trusts are such a popular addition to an estate plan is the many benefits they offer, including the ability to avoid leaving a lump sum inheritance. The terms of the trust, created by you, can be used to direct the distribution of the inheritance in staggered disbursements over as long a period of time as you wish. For example, you could distribute a small “allowance” on a monthly or yearly basis. You could also distribute the assets in smaller lump sums. This is often what parents of a minor child do. The child might receive a lump sum when he/she turns 18, then a larger lump sum at age 21 with consecutively larger lump sums every few years until the trust assets are depleted. Because you control the creation of the trust, you control how the trust assets are gifted to the trust beneficiaries, thereby avoiding a single lump sum gift.
Contact Lincolnshire Trust Lawyers
Please join us for a FREE upcoming seminar. If you have questions or concerns regarding how to use a revocable living trust to avoid a lump sum inheritance, contact the experienced trust lawyers at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.