31 Mar
Testators preparing their estate plans often identify specific beneficiaries whom they want to prioritize. They focus on leaving as much support as possible for the people closest to them or in the most vulnerable circumstances.
While those goals may be admirable, they can be harder to achieve than many people realize at first. In certain circumstances, testators establishing estate plans may want to create trusts as a way of separating a beneficiary from their inheritance and reducing their control over inherited property. Regardless of the true intentions behind a bequest, it could have a negative effect on the selected beneficiary.
Why could an inheritance have a negative impact?
There are several ways in which a large inheritance could cause negative repercussions for beneficiaries or heirs. In scenarios involving people with special needs, a large inheritance could eliminate their eligibility for certain state benefits, such as housing subsidies and specialized health benefits. Large inheritances can also cause tax complications for beneficiaries and heirs, especially if they liquidate valuable assets that have appreciated in value. Additionally, a large inheritance might potentially trigger conflict.
A beneficiary might find themselves at odds with their spouse or children who feel entitled to a share of the inheritance. One child who inherits more than their siblings might become estranged from those who inherited less from the estate. In scenarios involving vulnerable people, financial abuse is also a concern. Beyond that, beneficiaries could end up divorced or could face lawsuits that might consume their inheritance.
How a trust can help
Establishing a trust creates a degree of separation between beneficiaries and the resources left for their use. The trustee manages resources and distributes them as appropriate in certain circumstances. The person funding the trust can place numerous limitations on the use of trust resources. They can limit the use of trust assets to specific types of expenses, like educational costs. They can require that the trustee make direct distributions to outside parties rather than to beneficiaries.
There are also asset protection benefits that come from establishing a trust. They are less vulnerable to creditor claims and less likely to be at risk if a beneficiary divorces. The establishment of a trust can also help the trustor qualify for certain benefits later in life and limit estate tax liability.
Recognizing that a direct inheritance can be a source of conflict and challenges could help people see the value in creating more robust estate plans. Those hoping to optimize the positive impact that an estate has on others may eventually determine that they need more structure than a simple will provides.