Three Ways of Distributing Your Children's Inheritance That You Need to Consider

Three Ways to Distributing Your Children's Inheritance That You Need to Consider

When it comes to deciding how and when your children will eventually receive their inheritance, there are three options that are commonly chosen: outright, in stages, or in a lifetime trust. All three choices have their pros and cons so there is no right or wrong choice. As you will see, what it usually comes down to is the age, experience, and family/financial situations of your beneficiaries. 

1. Inheritance is immediately distributed outright

This is the most simple way to go because the inheritance is simply distributed directly to the beneficiaries once all of the decedent's bills and taxes have been paid.

While this may be a good choice for some, there are some drawbacks. Namely, this may not be the best choice for beneficiaries that are young or poor at managing money (it will be gone in no time), for those that are in a bad marriage (the inheritance could be lost in a divorce), for those that are in a profession that is high-risk (the inheritance could be lost in a lawsuit), or for those that are already wealthy (the inheritance will only increase their estate tax bill).

2.  Inheritance is given out in stages

This option holds a beneficiary's inheritance in a trust fund and pays the beneficiary one or more lump sums in stages - in other words when the beneficiary reaches a certain age or achieves a specific goal; then they'll receive an outright distribution of their inheritance.

For example, you could pay a beneficiary 50% of their inheritance when they reach the age of 25 and then the balance at 30, or 50% when they earn a college degree and then the balance when they complete graduate school or reach the age of 35.

Meanwhile, the property held back in the beneficiary's trust fund could be used by the Trustee to pay for the beneficiary's college or graduate education, medical bills, a car, housing, and any other day to day needs.

However, once the beneficiary receives a lump sum distribution, the same drawbacks as leaving an entire inheritance outright will apply. This option also requires a responsible trustee to manage the trust fund, which often entitles the trustee to compensation for his or her services in managing the trust (unless a trusted friend or family member is willing to do it for free).

3.  Inheritance is left in a lifetime trust

This option holds a beneficiary's inheritance in a trust fund for the beneficiary's entire lifetime. Similar to Option 2, while property is held in the trust, the Trustee can take out trust funds at anytime to pay for a beneficiary's day to day needs. 

With a lifetime trust, often times the Trustee is a third party while the beneficiary is younger (to protect the beneficiary from bad decisions and outside influences). Then, when the beneficiary is at an age where he or she will be responsible enough to take full control, the beneficiary is made the Trustee of his or her own trust.

This option has many benefits.  Any assets held in the trust are shielded from a beneficiary's creditors for their entire lifetime. This protects the assets from claims made by a beneficiary's spouse in a divorce, from any bankruptcy proceeding, and from claims made against the beneficiary in a lawsuit. This option would also ensure that any assets remaining at the beneficiaries' death would pass free of probate, state inheritance taxes, and federal estate taxes. 

However, like Option 2, this option does require ongoing trust management by a trustee - although once the beneficiary is named the trustee this is not much of an issue.

Call J. Cutler Law Today

At J. Cutler Law, we offer free consultations for you and your family regarding the right estate plan for you. We can help you outline all of your estate planning options based on your needs and advise on the best course of action. Call us today for a free consultation at (801) 618-4469 or contact us online.