As you prepare your estate plan, you could face a conundrum. Perhaps you have one or more heirs who never learned how to successfully manage their finances. They may struggle with gambling or substance abuse issues, nor be married to spouses who control all the money in the marriage.
Alternatively, they could have successful careers, but work in professions that expose them to litigation, e.g., medicine or the law. You wouldn’t want their inheritance diverted to litigious plaintiffs.
What options do you have?
One financial vehicle to consider is a spendthrift trust. These preserve the inheritance because the beneficiaries are unable to access the trust’s principal. Instead, a trustee whom you select oversees the management of the trust and handles the disbursements to your heirs.
You can even structure it so that the beneficiary doesn’t ever get cash from the spendthrift trust. Instead, the trustee may pay all their living expenses.
What about the tax consequences?
All trusts have tax implications. Cash disbursements and goods and services that the trustee gives or purchases for the beneficiaries can lower the federal and/or state income taxes owed on the trust.
Whom should you choose as trustee?
A trustee must be responsible, honest, and financially savvy. It generally is a good idea to choose someone without blood or marital ties to the beneficiaries. Doing that prevents any potential bad blood between the two over the trust or its disbursements.
A common choice for a trustee is a financial or legal professional with no interest in the trust or its beneficiaries. That avoids any hint of impropriety or favoritism among your beneficiaries.