A common question in the financial planning world is which is better for beneficiaries an inheritance or a trust? The best answer is that it depends on the situation. Read on to learn more. Then you can decide what will work best for you.
If your assets amount to a small amount of money, then an outright inheritance is likely your best bet. It’s the more cost-effective and simplest alternative.
On the flip side, if your assets amount to a significant amount of money, then a trust may be your best option. Leaving your assets in a properly drafted and managed trust offers protections against a myriad of situations your beneficiaries could encounter.
What is a trust?
A trust is an estate planning document that sets the guidelines on how to distribute assets or provide for a loved one after your death. There are many reasons to use a trust rather than a will for your assets. But the most common reasons to use a trust include the ability to:
- Reduce estate tax liability
- Protect property in your estate
- Avoid probate
Depending on your situation, your beneficiaries may benefit from having your assets in a trust. Not having to go through probate is beneficial if they need access to funds to pay bills and maintain property in your estate. Trusts generally avoid state probate requirements and the associated expenses.
By setting up a trust, you can protect the property in your estate from potential situations that may happen in the future, many of which your heir wouldn’t otherwise be able to protect themselves from later in their lives. The following are some of the potential situations.
A trust may offer protection in the event of divorce. You never know if/when a marriage can go sour. With an outright inheritance, the spouse often can claim a share of the assets in a divorce or separation. If you leave the inheritance in a trust, it may not be considered part of the marital estate.
If your heir has a tendency to spend or isn’t financially sophisticated, inheriting a lot of money outright is a dangerous proposition. Chances are they’ll waste the money on bad purchases.
However, if the money was given in trust, there is a trustee (or multiple trustees) who has the power to dole out the money. Think of the trustee as a gatekeeper. The trustee has the power to make all decisions, but it’s the trust itself that you set up that provides the guidelines to the trustee.
If you are concerned that your child won’t focus on the long-term, it’s probably best you put your assets in a trust.
Financial difficulty is another issue where a trust is useful. If your beneficiary finds themselves in debt or worse, dire financial problems such as bankruptcy or business loss, a trust enables you to safeguard the inheritance. Your beneficiary will have access to the assets based on your directions you leave in the trust.
Unfortunately, we live in a litigious society. You never know if your heir will be involved in a lawsuit. If they inherit outright money or assets and they’re sued, they could lose their inheritance. But since the trust is a separate legal entity from the beneficiary, in the event your heir is sued, this separation provides much better protection for the assets.
Trusts Can Be Costly
There are a lot of good examples for leaving assets in a trust due to the protections it offers. However, there is a downside. Trusts can be costly. Creating a trust is expensive.
The process can involve various people. Take an attorney for example. They may help to develop and review the trust. And their time is expensive. You may also find your circumstances change and as a result you’ll want to amend the trust. This will cost you additional money.
Although there may be some expenses in developing and maintaining a trust, you should strongly consider it due to all the protections it offers your beneficiaries. Make sure you speak to an estate planning attorney about your situations and to help guide you in your selection of the type of trust is best for you.
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