Most often people direct in their will that their estate assets are to be transferred direct to beneficiaries. However, there are circumstances when transferring your assets to a trust for the benefit of a beneficiary is a much better idea. For example, if assets are payable to a minor or to a person who is receiving government benefits, a trust is frequently the preferred method of handling the transfer.
Another instance when a trust is used is when you are concerned about the beneficiaries’ ability to manage the amount of assets you could potentially be leaving them. Or perhaps the beneficiary is in a marriage that is having problems or works in an occupation that could subject the beneficiary to lawsuits. In all of these instances a trust can help protect the assets you are leaving.
But using a trust is not as simple as just leaving the assets directly to the beneficiary. The terms of the trust must be tailored to your objectives. The language of a trust to protect a beneficiary with special needs will be significantly different from the language of a trust for a minor or a trust intended to accomplish some other purpose. Additionally, you will need to designate who you want to serve as trustee of the trust – that is, the person who will ensure that the trust principal is invested appropriately and disbursed according to the terms of the trust.
But some people ask why they cannot simply leave their estate to a trusted family member who would hold it for the benefit of the beneficiary, without all the legal formalities of a trust. I’m sure some people probably do that and in some circumstances it might work out fine. But most likely, problems will arise. For example, if you leave your estate to a brother so he can dole it out to your children as they need it, your brother may have to file gift tax returns depending on how much he distributes, when he distributes it and how he distributes it. Additionally, even assuming your brother does not just dip into those assets for his own use, the assets would be subject to claims from your brother’s creditors and could disappear well before your children are grown.
Without a trust, there is far less protection to ensure your estate ends up being used for the purposes you intend for them. For additional information on trusts, see other posts on this blog or go to my firm website.