Control Can Be a Good Thing

Should you control the money you leave your loved one after your death from the grave or not? This is a question that a lot of my clients ask themselves.

For instance, should you have a last will and testament that simply leaves everything you own to your children outright and free of trust or should you leave them their inheritance in a trust?  What should the terms of the trust be?  Who should serve as trustee of the trust?  The child?  Someone other than the child?

Most people have simple Wills.  A simple Will is a Will that leaves everything to the decedent’s children, equally and free of trust.  Simple Wills have great advantage.  When someone dies, it’s hard enough, and sometimes, even a simple Will can be too difficult for the family to execute properly.  I have seen families fight over a Will that leaves the decedent’s assets equally and outright to all the children.

But a simple Will does have disadvantages.  For instance, if a child has money-management issues, drug or alcohol issues, or a disability, a Will that leaves the child his inheritance outright and free of trust can be devastating.  The child may quickly squander the inheritance and be left with no money on which to subsist for the remainder of his life.  Had his inheritance been left to him in trust, the inheritance may have provided a comfortable life for the child.

An inheritance can disqualify a disabled individual from public benefits.  For instance, if the child is a beneficiary of the Medicaid program, a modest inheritance will disqualify him from Medicaid.  The inheritance would then have to be used to pay for medical expenses for which the Medicaid program would have paid had the child not been disqualified from Medicaid.  Instead of benefitting the child, the inheritance would be squandered on medical expenses that would have been met with Medicaid.

If the child has a judgment against him—for instance, from a lawsuit—the inheritance may be used to satisfy the judgment.  Instead of the child benefitting from your money, his judgment creditor would benefit from your money.  While it is nice that the judgment creditor received what is owed to her, I’m sure you wouldn’t have been interested in using your lifetime savings to satisfy your son’s creditor.

If you leave money to your child and your child dies a year after you died, the money you left him will, in all likelihood, pass to his spouse.  If his spouse were to remarry, then your grandchildren may never benefit from the money you left your son.  The money may pass to the wife’s new husband, not your grandchildren.  This is not something most people would want to happen, but something that could easily happen.

A trust permits you to leave money to your children in a manner that prevents your child’s problems from impacting the money your leave him.  A typical trust used to handle these issues is a testamentary trust, or a trust in your last will and testament.  A testamentary trust is simply words in your Will.

Some people consider testamentary trusts to be your attempt to control your money from the grave.  To some extent, the trust is just that, but in many cases, the benefits the trust bestows outweigh control and complication issues that people believe trusts cause.

With that said, I believe it is best to keep the terms of the trust simple, and unless the circumstances dictate a different result, to name the primary beneficiary of the trust—your child—as the trustee of his own trust.  By keeping the terms of the trust simple and by naming your child as trustee, the trust bestows a great many benefits on the inheritance you leave your child (creditor protection, death protection) and mitigates the complications associated with the trust.

With that said, there may be circumstances in which your child cannot be trustee (if he is disabled or has issues with drugs or is a minor), but when you can, it is best to have a trust but to keep it as simple as possible.

Comments are closed.