By: Laurie Valentine-COO and Trust Counsel
Leaving an inheritance outright to a young or incapacitated beneficiary is not good estate stewardship.
An outright bequest (or life insurance or other beneficiary designation) to an under age 18 beneficiary will require a guardian to be appointed to manage the young beneficiary’s share of your estate until he/she reaches age 18 (even if there is a surviving natural parent). At 18, the young beneficiary will receive full ownership and control of the inheritance, no matter its size.
A “testamentary trust” may be a better alternative.
A “testamentary trust” is a provision in your Will under which you designate a third party to serve as the trustee/manager of a beneficiary’s share of your estate. A testamentary trust usually includes a direction for the trustee to distribute the trust’s income to or for the benefit of the beneficiary. The trustee can also be authorized to use principal for the beneficiary’s education, health and other needs, if the income from the trust and other resources are not sufficient.
A testamentary trust for a young beneficiary does not have to end at age 18. You designate in the testamentary trust provisions the age when the trust will terminate and the beneficiary will receive full ownership of his/her share. The full trust amount may be distributed at a single age; or you may want to use a “tiered” distribution—-one-half at one age and the rest at a later age; or one-third each at three different ages.
Testamentary trusts may also be used to provide for an elderly or incapacitated beneficiary. The trust provision can direct an income stream (and possibly also principal) to or for the beneficiary for the rest of his/her life; with the remainder of the trust then distributed to other beneficiaries you name at the death of the income beneficiary.
Ease young beneficiaries into the management of inherited wealth and eliminate the burdens asset management might place on an elderly beneficiary by including testamentary trust provisions in your estate plan.