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Trending: Protecting a Beneficiary’s Inheritance for Retirement

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Posted on Feb 28, 2017 | Share this post: Like Us on Facebook Join Us on Google Follow Us on Twitter

For decades, or, frankly, centuries, continuing trusts for a beneficiary have been a way to deal with a person too young or irresponsible to manage his or her own assets.  In a basic arrangement of this kind, a person selected as trustee has the ability and duty to manage and distribute trust assets for the beneficiary. For instance, Mom and Dad might create a trust so that if something happens to both of them when Daughter is only 9 years old; Mom’s Sister as Trustee would manage Daughter’s inheritance and decide how much money she needs until she reaches, say, age 25.

However, a variety of reasons have made it advisable to keep a beneficiary’s inheritance in trust even if he or she is old enough and responsible enough to make financial decisions. We routinely recommend that an inheritance for competent adults be held in continuing trusts, which we like to call Lifetime Protection Trusts. In these arrangements, the beneficiary can be his or her own Trustee, and therefore decide how to spend trust money without asking anyone else. Even with that much control, those trusts are still legally protected from spouses, lawsuits, creditors, and bankruptcy; plus, for wealthier beneficiaries, can reduce estate taxes for future generations. As an example, Daughter (now Dr. Daughter) might be brilliantly responsible with her finances, but she still faces the risk of lawsuits. So, if Mom leaves Dr. Daughter’s inheritance in a continuing trust, even with Dr. Daughter as her own Trustee, if someone ever sues Dr. Daughter for malpractice, they can’t legally get at the assets within the trust.

Recently, more clients have been concerned that their beneficiaries need a bit more long-term protection. Specifically, we’ve noticed clients wanting to structure the inheritance in a manner that provides for the child’s retirement.

There are multiple reasons. Some people look at their 30-something and 40-something children and question their financial wisdom. They worry that if the kids spend their inheritance on luxuries before retirement, they may be left out in the cold during their golden years. Some realize that their children have lower incomes than they did at that age, and, more importantly, less generous company retirement benefits. At the same time, life expectancies are expanding. For a variety of reasons, some may not want to leave complete control over an inheritance to their middle-aged beneficiary.

There’s a spectrum of ways these goals can be accomplished. Some individuals may want only to put words of wisdom into their documents and gently remind the children to plan for their long-term benefits. More often, people want to put in binding limitations on how much a child can distribute from his or her trust. For instance, distributions can be strictly limited so they do not exceed the net income or a certain percentage of the trust value in a given year. If a child is his or her own Trustee, these limitations may be legally binding, but there may be no practical way to enforce them if the child ignores the restrictions and spends the money. Therefore, for the most security, another party can be left in control until the child reaches retirement age – or after. That provides far more assurance that the money will be there when the beneficiary really needs it.

Some clients shy away from trying to “control from the grave.” And terms certainly can get more complicated than they should for future generations. But trying to maximize the benefit for your loved ones by structuring what they receive to be there when they really need it is a tremendous benefit. If you think your children may be miserable at age 65 because they squandered the significant inheritance you left, then providing a more structured trust can help.