There is no one particular estate planning approach that is ideal for everyone. There are different vehicles of asset transfer that can be utilized, and a layperson would have no reason to understand all of them.
This is one of the reasons why it is important to discuss all available options with a licensed estate planning attorney from our firm. We can gain an understanding of your family dynamic and your legacy goals and make recommendations based on the circumstances.
With this in mind, we will look at a cautious approach that can be taken when you are leaving an inheritance to a loved one that is not a good money manager.
Revocable Living Trust
A revocable living trust is an effective estate planning device if you have concerns about the spendthrift tendencies of a loved one.
As the name would indicate, you do not lose control, because you retain the right of revocation. If you ever choose to do so, you can rescind the trust and take back direct possession of the assets.
Plus, you would act as the trustee while the trust is active, so you would have access to the assets.
To account for the events that will take place after you are gone, you name a successor trustee, and your spendthrift loved one would be the beneficiary. After you die, the trust would become irrevocable, and the trustee would manage the assets on behalf of the trust.
When you establish the living trust declaration, you can instruct the trustee with regard to the nature of the distributions that will be paid out to the beneficiary. To provide an example of an approach that is commonly utilized, let’s say that you have income producing assets in the trust.
The beneficiary could calculate the anticipated annual earnings and distribute that amount divided up into monthly increments. In this manner, the principal would remain intact to continue to generate income over the long haul.
If you want to do so, you can give the trustee the latitude to make discretionary distributions under certain circumstances. You may want to create a structure with regard to lump sum distributions of portions of the principal when the beneficiary reaches certain age thresholds.
When you are choosing a successor trustee, the nature of the structure would have something to do with your decision-making. If the trust is going to remain viable for an extended period of time, you may want to use a professional fiduciary like a trust company or the trust department of a bank.
A spendthrift provision will keep the principal safe from most of the beneficiary’s creditors. This being stated, once assets have been distributed to the beneficiary, they are no longer protected by the trust.
The ability to protect a spendthrift heir is one advantage that you gain if you use a living trust, but even if this is not a problem, there are many other advantages. One of them is the streamlined estate administration because of the consolidation of assets and the avoidance of probate. We will take a closer look at the benefits in a future post.
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