In my experience, the goal for many of my clients in estate planning is to preserve accumulated wealth in an effort to provide security to their survivors. In this day in age of market instability and economic uncertainty, our survivors are going to need all the help we can give them.
Most revocable trusts are promoted solely for the purpose of avoiding probate. These “will substitutes” typically direct the successor Trustee to distribute the remaining trust assets to the named beneficiaries in a lump sum, free of trust. Although this approach offers protection from the expense and delay of probate, it does not protect beneficiaries from their creditors or even themselves.
One option to provide your beneficiaries with as much financial security as possible is not to give them unfettered control of their inheritance immediately upon your death. Rather, keep their inheritance in trust for their long term benefit. Give an independent trustee discretion to determine when and in what amount a distribution should be made. An independent trustee will provide or obtain professional portfolio management, which helps to avoid issues caused by your beneficiaries’ potential mismanagement of trust funds. Giving the trustee discretion to make, or not make, distributions, will also protect your beneficiaries from their creditors, including future ex-spouses, and even predators.
A discretionary distribution trust also offers you an opportunity to shape the behavior of younger beneficiaries by offering incentives for the achievement of certain goals. For instance, upon graduation from college, you can direct that the beneficiary receive a trust distribution to help with the purchase of a car or furniture for an apartment. You can also direct distributions of principal to begin when the beneficiary reaches retirement age. Of course, it is always advisable to include a provision for distributions in the event of a bona fide hardship or emergency.
You can use a discretionary distribution trust to pay tuition for grandchildren and more remote descendants, to pay a beneficiary’s health insurance premiums, deductible and out-of-pocket medical expenses, and to provide income replacement to the beneficiary for participation in employer sponsored medical and retirement plans.
You earned the wealth you have accumulated. You made sacrifices to save. You also exercised restraint in investing towards a better future for yourself and your loved ones. The final step in providing financial security to your loved ones is a simple one… asset protection provisions of your estate plan may be your most important legacy.
Thank you to Katina Pantazis, P.A.