Unfortunately, many people equate the estate planning discussion to a discussion of their own mortality. While final wishes are certainly a part of the conversation, estate planning encompasses much more. In fact, it can be a very positive experience. Your Central Trust Company advisors can help you through all of the various decisions you need to make to be well-prepared when it comes time to visit with your estate planning attorney.
The overwhelming majority of my clients indicate that at the end of their lives, they would like to leave their children and/or grandchildren an inheritance of some kind. However, they are uncertain as to the best method of transfer. Is it better to give the inheritance to their heirs outright or leave it in trust for their benefit?
It is imperative that your financial advisor, tax advisor and estate planning attorney understand the full picture before they recommend a course of action. While it may be difficult, be prepared to take an objective look at your family situation. I have met with several clients who are initially reluctant to share what they deem to be an “embarrassing” or “unusual” family situation or circumstance. This reluctance generally dissipates after some reassurance and the realization that their situation is not all that unusual. Remember, we're here to help you, not judge you. We want to help you do what is best for both your hard-earned assets and the futures of your loved ones.
There are numerous family scenarios and situations, and more often than not, family dynamics play a large role in determining how best to leave assets to your heirs. Here are a few examples of situations that lend themselves very well to trusts:
- You have minor children.
- You have a blended family.
- Your heirs have blended families, or you simply want to make certain the funds are not co-mingled with the child's spouse's assets.
- This isn't your first marriage.
- You have heirs who are spendthrifts.
- Your heirs have special needs.
- Your heirs have physical addictions.
- You want to make certain the inheritance lasts for your grandchildren.
- You want to provide an incentive for your children or grandchildren to be gainfully employed.
A trust is not the only answer, but in each of the aforementioned scenarios, there is a distinct possibility that a large injection of unrestricted funds would create or exacerbate existing tension and/or problems.
Here are just a few of the benefits of leaving the assets in trust:
- A trust can offer heirs protection from themselves. Whether an inheritance is intended for minor children or grandchildren, heirs with special needs, heirs with substance abuse problems, or heirs who are spendthrifts, a trust may provide the appropriate protection to ensure the funds last for the heir's lifetime and help prevent premature depletion of the trust assets.
- A trust can offer financial protection. If a trust owns the assets and your heirs do not, it is much more difficult for them to lose the assets in a divorce, a lawsuit or another such legal dispute.
- A trust can discourage laziness and/or an aversion to work. Leaving your assets in trust can help prevent the sense of entitlement a lump sum may create or further. This can be done in a number of ways, but often, distributions are doled out over the heir's lifetime at certain ages or in conjunction with certain milestones.
There are times when giving an inheritance to your beneficiaries outright may be the most appropriate way to proceed. However, this approach requires careful planning. Certain illiquid assets and items of personal property are much easier to leave directly to your beneficiaries, rather than in a trust. Also, if you have a very stable, financially responsible heir who is already accomplished at managing his or her financial affairs, it may make sense to leave their inheritance to them outright. Another consideration is the size of your estate. If your estate is not large enough to warrant the expenses of the administration of a trust, you may want to consider another method of handing down assets.
To determine whether you should leave an inheritance outright or in trust, you may want to consider arranging a gifting plan during your life. This will allow you to see your loved ones enjoy your gift, and it offers the added benefit of being able to see how responsible your beneficiaries will be with gifts of cash. This approach may provide insight as to how you should design your estate plan.
Unfortunately, there is no one-size-fits-all formula that works for every situation. In the end, your wishes, along with your family situation and dynamics, will determine what is best for you and for your family. As you embark on the “journey” of deciding how to pass your assets on to your heirs, it is very important to be objective with your analysis of your family dynamics, and to consult with your financial advisors. You may even want to have a joint meeting with your Central Trust Company team, your attorney, and your accountant. Depending on your level of wealth, your decisions may very well may have significant tax implications you will need help navigating.
Keep in mind that the biggest estate planning mistake people make is not having a plan. By simply beginning the conversation, you are moving in the right direction. To trust or not to trust? It is a question only you can answer. Seek the advice and input of professionals, make the best decisions you can, and make it a priority to review your plan every few years or when your life circumstances change.
Contributed by Keith Schawo
Senior Vice President & Relationship Manager, Central Trust Company