It’s a common estate planning worry. Would a large inheritance squelch your children’s drive to carve their own paths in life? It’s a conundrum many parents and grandparents will have to face in the coming decades. Over the next 25 years, a staggering $68.4 trillion in wealth is expected to transfer between generations, according to a 2018 report from research firm Cerulli Associates.
Are the heirs prepared to handle all that money? There’s a lot to worry about. A nest egg intended to cushion kids’ lives could instead lead to failure to launch.
The best solution? Estate planners say a well-designed trust can provide families with plenty of protection against inheritance loss or inadvertently creating a stereotypical trust fund baby.
Influencing Heirs from the Great Beyond
Estate planning attorney Tyler Britton says he’s noticed an interesting difference in the way baby boomers are now using trusts for the upcoming generation of millennial heirs. “As an estate planner, I am seeing an increase in the amount of conditions found in trust documents,” says Britton, professor of trust and wealth management at the Lundy-Fetterman School of Business at Campbell University.
The individuals creating the trusts want to set up guardrails that take into account the beneficiaries’ different lifestyles, priorities, and desires. These conditions allow a grantor to feel like he or she is still in control during his or her lifetime or after death.
A trust is basically a legal agreement in which one party – called the grantor or trustmaker – puts assets in the care of another party, the trustee. The trustee manages the assets and carries out the instructions over time, for the benefit of a third party, the beneficiary, who could be a person or an institution.
A will gives instructions for distributing your property and is essential for naming guardians for minor children, but you typically can’t set specific conditions in a will. With a trust, you could set virtually any condition—giving you greater control over the distributions that are made.
The Flexibility of Revocable Living Trusts: There are many types of trusts, but the most common is a revocable living trust. It’s called “living” simply because it goes into effect while you’re alive, and “revocable” in that you are free to change the instructions you provide.
Irrevocable Living Trusts Provide Liability Protection: Irrevocable living trusts can’t be terminated and are very difficult to change. Such trusts can be used to reduce taxes or protect assets against creditors or lawsuits.
Spendthrift Trusts Protect Heirs from Themselves and Others: A spendthrift trust won’t turn your heirs into financial whizzes, but it can safeguard property in the trust from loss. “Not only does this type of trust protect heirs who lack proper judgment when it comes to spending money; this trust also protects financially responsible heirs from certain lawsuits and creditors,” says Britton. While money is in the trust, your heir can’t spend it, give it away, or lose it.
Special Needs Trusts Protect Eligibility for Benefits: Another reason for an irrevocable trust would be to provide financial support for a child with a disability, while protecting his or her eligibility for public assistance. You can put money or property into a special needs trust and appoint a trustee to use the funds to purchase necessities for the beneficiary. The beneficiary doesn’t own the property in the trust, so it would not prevent the person from applying for government benefits.
