Should I leave assets outright or in a trust?

Whether you choose to leave beneficiaries cash or other inheritances by way of a Revocable Living Trust or a Will, many people struggle with the dilemma of whether to make such gifts outright or in trust for the benefit of the beneficiaries.


Do

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  • what you feel is best
  • consider the beneficiary’s situation
  • understand the powers and benefits of a trust
  • understand tax ramifications
  • consider the nature of the assets
Don't

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  • be afraid of a trust
  • be afraid to talk with your beneficiaries
  • be overly restrictive or overly lax
  • try to predict the future
  • try to make this decision on your own

Eido M. Walny, J.D., AEP, EPLS‘s recommendation to ExpertBeacon readers: Do

Do what you feel is best

Given their choice, there is no beneficiary who would ever want anything other than to be handed a check – no matter how large or small. As the gift giver, you need to recognize that ultimately, this is your money and you get to decide how gifts will be made. Don’t try to guess what the recipients might want. Do what you think is best for them and what makes you feel most comfortable.

Do consider the beneficiary’s situation

If your beneficiary is a minor, a gift in trust is almost always the right move. However, other factor’s related to the beneficiary should be considered. How old is the beneficiary? How mature and responsible is the beneficiary? If the beneficiary is married, how stable is the marriage? Does the beneficiary have a drug, gambling, or alcohol problem? These are just a few of the questions that should be asked when considering if an outright gift is appropriate or if a trust is the better path to follow.

Do understand the powers and benefits of a trust

There is an adage in asset protection that what you don’t own can’t be taken away from you. Because this is generally true in the application of the law, consider that a trust can bestow a level of asset protection to your beneficiary in a way that is helpful to them, especially in a time of litigation, divorce, or other such problems.

Do understand tax ramifications

While gifts and inheritances are not generally counted in a recipient’s income taxes, there are potential wealth transfer tax implications in the estate of the beneficiary. Each US citizen is allotted a certain amount of money that they can pass along tax free. Making an outright gift to someone on the threshold of the tax may cause negative tax consequences to that person’s heirs. A properly structured trust may be able to avoid those consequences.

Do consider the nature of the assets

The size and nature of the assets being left to the beneficiaries may have an impact on whether it is appropriate to use a trust or do an outright gift. Trusts always have costs of administration, so small gifts are rarely appropriate in a trust. Large amounts of cash, on the other hand, has the propensity to do a lot of damage to people, especially young people. In those cases, a trust should strongly be considered, even for mature and well adjusted young people.


Eido M. Walny, J.D., AEP, EPLS‘s professional advice to ExpertBeacon readers: Don't

Do not be afraid of a trust

People often worry about creating a barrier between loved ones and gifts or inheritances. But that should not be the case. Often trusts are not set up to be restrictive vehicles but to be a means to enhance the asset protection or tax efficiency of a gift. Although beneficiaries don’t like to hear it, trusts can often be a very good and positive thing for them.

Do not be afraid to talk with your beneficiaries

There is no reason that a gift giver needs to make the decision in a vacuum of whether to leave assets in trust or not. While it may not always be prudent, consider talking with the beneficiary and getting a sense of what they might want or how a trust should be structured for their benefit. Trusts can be very flexible so sometimes this input can be helpful in advanced planning.

Do not be overly restrictive or overly lax

Remember that when making an outright gift, the beneficiary is free to use that money however he or she pleases, no matter how silly or prudent. When leaving assets in trust for heirs, it is important to remember that the trust is the rulebook for the administration of the assets for the beneficiary. As such, it is important not to make the rules so lax that the trustee has no guidance. Conversely, the rules cannot be so strict as to paint the trustee into a corner when decisions need to be made.

Do not try to predict the future

Most basic estate planning documents can be fairly easily changed until death. Don’t feel like you’ve got to predict if a 5-year-old grandchild will turn out to be a mature adult in a stable marriage. No one has that power. Instead, plan for your current situation and what you feel is best under today’s circumstances. As time passes and situations change, know that you can go back and alter your documents to reflect those changes circumstances.

Do not try to make this decision on your own

There is no such thing as a “simple will” and there are dozens of variants of trusts, each having different qualities and characteristics. Like most legal matters, the decision of whether to make gifts outright or in trust can be a complex decision. Seek the help and advice of a qualified estate planning attorney who can talk to you about your various options.


Summary

Leaving assets to heirs can be a tall task for people. There are often numerous considerations that need to be addressed, including whether to leave assets in trust or whether to leave those assets outright to the beneficiary. This decision has consequences for both the gift giver and the beneficiary, so careful consideration should be given to the gift.

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