We have all been taught from a young age that having a Last Will and Testament in place is imperative. We are also all taught that a Will can be used to leave an inheritance behind for our children. While it remains important to have a Will in place, and it is true that a Will can be used to gift assets to your children, the Lincolnshire estate planning attorneys at Hedeker Law, Ltd. explain why a trust is often the better choice for passing down an inheritance to your children.
How Does a Trust Work?
All trusts are fundamentally the same in the sense they all create a legal relationship wherein property is held by one party for the benefit of another. A trust is created by a Settlor who transfers property to a Trustee, chosen by the Settlor, to hold the property for the trust’s beneficiaries. All trusts fit into one of two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Will and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust, as the name implies, does activate during the Settlor’s lifetime. Living trusts can be further broken down into revocable and irrevocable living trusts.
Benefits of Using a Trust to Gift to Children
If you are the parent of a minor child, gifting through your Last Will and Testament makes even less sense than if your children are adults because your minor child cannot inherit directly from your estate. Assets left to your minor child in your Will must be managed by someone until they reach the age of majority; however, a court will decide who that person is which is reason enough not to use your Will to gift to your minor child.
You can, of course, use a Will to gift your entire estate, or any part thereof, to your adult children as well; however, gifts made in your Will are distributed directly to the beneficiary without any conditions or controls. Once the gift is made, the beneficiary can do anything he/she wants with the gift. That lack of control can be a serious problem if you are gifting to a young adult beneficiary or a beneficiary with a history of not handling money well. A gift made in your Will is gifted in one lump sum without any conditions on the use of those assets. No matter how responsible your young adult child may be, handing a 19 or 20-year-old a valuable lump-sum inheritance can be a bad idea. It takes a good deal of trial and error for anyone to learn how to properly manage and invest money. That trial and error usually occurs over a period of time when we are young and don’t have a considerable amount of money to lose. With a lump sum inheritance, however, your child could lose it all rather quickly.
Using a trust to pass down an inheritance, however, ensures that the assets intended for your child will be protected while he/she is a minor by someone of your choosing. When you create the trust you get to appoint the Trustee. In addition, a trust can provide staggered disbursements which is a huge benefit if your child is a young adult and/or not particularly responsible with money. A trust also offers you the ability to control how the trust assets are used to a large extent. You can use the trust terms, for example, to dictate that your child can only use his/her inheritance to pay for educational expenses, medical expenses, and/or living expenses. This greatly reduces the possibility that the inheritance you leave your child will be squandered after you are gone.
Contact Lincolnshire Estate Planning Attorneys
For additional information, please download our free estate planning worksheet. If you have additional questions or concerns about how best to pass down an inheritance to your minor child, contact the experienced Lincolnshire estate planning attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.