In planning for the next generation, many parents struggle with the decision of whether to transfer property to their children outright or in trust. Some feel that transferring property outright is the best option when the beneficiary is competent (i.e., mature, intelligent, financially savvy, and capable of managing money and making investment decisions). A beneficiary who is incompetent may be an individual who is still a minor, immature, reckless, a spendthrift, or incapable of handling asset management decisions. In designing a family legacy plan, it is important to note that the beneficiary of a well drafted trust enjoys many advantages that are not available if assets are owned outright, such as asset protection and tax savings. These advantages may be valuable to all beneficiaries, even those who are more than capable of managing an inheritance received outright and free of trust.
When considering the use of long-term trusts for beneficiaries, keep in mind that a trust may be structured to avoid any unnecessary restrictions or controls on a beneficiary’s access to the trust and may provide the beneficiary with a fair amount of control over his or her trust without jeopardizing the benefits of the trust structure. In contrast, a trust created for a beneficiary who is incompetent may severely limit or eliminate any of the beneficiary’s control over the trust assets. In discussing with your legacy planning advisor the issue of control over trusts, consider that there are many types of control, including investment control, dispositive control (the ability to make distributions from the trust), and control over trustees (the ability to remove and replace a trustee). The beneficiary may be given the opportunity to earn more control by reaching appropriate milestones (i.e., a certain age or a college degree) or granted partial control over certain aspects of the trust, such as the appointment of successor trustees or investment decisions.
Before creating a family legacy plan, it is important to seek the advice of an attorney with experience in estate planning so that your plan can be properly structured and creatively deal with differences among your beneficiaries. If not properly drafted, your legacy plan could backfire and instead of leaving your family with resources to enable them to improve their lives, your legacy may be squandered, or be subject to unnecessary tax, or even create adverse tax consequences for your beneficiaries.