Handle with care: Tips on planning for the fragile beneficiary

Today, estate planning can encompass more than addressing your potential tax exposure. It frequently requires protection of a “fragile beneficiary,” who can include family members with disabilities, individuals struggling with addiction, spendthrifts and even minors, and there are planning options available to do so.

Providing for a minor beneficiary

Most estate plans contemplate that a minor beneficiary will likely receive an inheritance. If you have minor children, you should articulate your wishes for who will care for your children and how your children’s financial needs will be met.

If a minor child inherits property outright, a conservator often must be appointed to handle the property until the minor reaches 18. Many parents are hesitant for their children to receive assets outright at that age. If so, the use of a trust may be attractive. It allows for the assets to be available for a minor’s benefit but held under terms you set. You, also, will determine when the trust should terminate. For example, the trust may terminate at a specified age, or staggered over certain ages. Alternatively, the assets may be held in trust for the beneficiary’s lifetime, which can provide a level of asset protection.

Planning for a beneficiary with a disability

Families are frequently motivated to arrange their affairs in a manner that is beneficial to a loved one with a disability, particularly if he or she is receiving needs-based government benefits. Many do not realize the options available and believe incorrectly that the only option is outright disinheritance of such a beneficiary, which can be disastrous and devastating.

A valuable technique for a family that wishes to provide financially for a family member with a disability is a special needs trust (SNT). It is an irrevocable discretionary trust created by someone other than the loved one with a disability, of which such loved one typically is the primary beneficiary. Generally, the SNT directs that the trustee may supplement, but not supplant, the government benefits that the beneficiary receives. This is done with a goal that the SNT will not be considered an available resource for the purpose of determining eligibility for needs-based government benefits.

Even if your intended beneficiaries are of age and do not have health issues, it is possible that the beneficiary has other issues that make an outright distribution at your death undesirable. The beneficiary may be inexperienced with money or may have debt. The beneficiary may be in a marriage where divorce is a possibility or be struggling with addiction. In these situations, you may wish to leave the beneficiary assets in trust instead of outright.

Assets in a discretionary lifetime trust, under Missouri law, are generally protected from the beneficiary’s creditors. Unlike a trust that mandates distributions to a beneficiary, a discretionary trust gives the trustee broad authority to look at the beneficiary’s situation and determine whether a distribution will be in the beneficiary’s interest. These trusts are designed to protect beneficiaries with possible creditor or divorce issues. Simply said, these trusts can provide a safety net for the beneficiary and preserve the trust assets.

Shielding easily influenced beneficiaries and implementing incentive planning

Instead of seeking to safeguard the inheritance a beneficiary may receive, you may be motivated to influence your loved one’s values and future behavior. By adding incentive or disincentive provisions, you may be able to guide the choices and actions of your family, even after you have passed.

Incentive provisions regarding a beneficiary’s education are common. They may be structured to reward a beneficiary for reaching a particular educational milestone. A parent may also wish to encourage a child’s employment to incentivize hard work or certain types of employment. The trust could encourage home ownership by authorizing distributions for a down payment on a residence. Similarly, to support entrepreneurship, the trust could authorize distributions or loans from the trust for a beneficiary to start a business.

Implementing advanced planning for successful beneficiaries

Beneficiaries without spendthrift, health or relationship issues can also benefit from advanced planning. If you plan to leave assets to a beneficiary who has the potential to incur significant personal liability due to his or her profession, you should consider an irrevocable discretionary lifetime trust. Individuals working in certain professions, such as doctors, attorneys, accountants, and general contractors, typically have heightened asset protection concerns. If an inheritance is left to such an individual outright, the amount could be attached by a judgment creditor upon distribution.

An inheritance left in a discretionary lifetime trust is generally not subject to attachment until the distribution is made to the beneficiary. The beneficiary typically can be appointed a trustee to control investments and distribution decisions. A successful beneficiary may also have a need for tax planning. If the beneficiary’s inheritance is properly left in a lifetime trust, it may be removed from his or her taxable estate for federal estate tax purposes.

You may consider estate planning to be the transfer of your assets to your loved ones in a tax-efficient manner. However, it is also the process by which you motivate, and at times protect, your loved ones.

Greensfelder is a full-service law firm with offices in St. Louis, Clayton, Southern Illinois and Chicago. Learn more about the firm at greensfelder.com.

This article has been prepared by Greensfelder, Hemker & Gale, P.C. for general informational purposes only and does not constitute legal advice or an opinion of counsel. Each legal problem is different, and you should not act on any of the information contained herein without first consulting legal counsel. The choice of a lawyer is an important decision and should not be based solely on advertisements.

This article originally appeared Biz Journals.


More Articles