One of the primary reasons to create an estate plan is to ensure that your assets are distributed according to your wishes following your death. As such, one of the first things you should do when you decide to create an estate plan is to decide who your beneficiaries will be. These are the people (or organizations, family pets etc.) who will inherit from your estate. What do you do, however, with a problematic beneficiary? For example, should you hand down a lump sum of money or other valuable assets to a beneficiary with an addiction or who suffers from a serious mental health condition? To help address your concerns, the Grand Forks trust attorneys at German Law discuss how to handle problematic beneficiaries in your estate plan.
Who Is the Problematic Beneficiary?
Every estate plan is unique; however, the average plan aims to provide for close family and other loved ones after the death of the plan’s creator. Typically, that means that a spouse and/or children are beneficiaries of the plan. If the beneficiaries are all adults, your estate plan will likely gift assets directly to the beneficiaries.
What happens, however, if you are concerned about handing a beneficiary a large sum of cash or other valuable assets because the beneficiary has a history of alcohol or substance abuse, has struggled with mental health issues, or simply cannot seem to manage money well? This is your problem beneficiary.
When a problem beneficiary is someone close to you that you want to provide for in your estate plan it creates a real dilemma. Simply removing them as a beneficiary is not a viable option, but neither is handing them money that you are certain will be wasted in short order.
Estate Planning Tools and Strategies for Problematic Beneficiaries
Fortunately, there are estate planning tools and strategies to help you resolve your dilemma. The most common solution to problematic beneficiaries is to use a trust to distribute their inheritance. A trust is a legal arrangement that lets you (the “Trustor”) appoint someone you trust (the “Trustee”) to manage assets intended for the benefit of a third party, in this case your problematic beneficiaries.
Among the numerous benefits to using a trust instead of directly gifting assets in your Last Will and Testament is that someone of your choosing will have the legal authority, or obligation, to manage the inheritance you leave to the trust beneficiaries. As the Trustor, you can appoint anyone you want as the Trustee; however, to provide yet another layer of protection you may wish to consider appointing a professional Trustee. The Trustee invests trust assets to help the trust principal grow. The trust terms, created by you, are used to guide investment of assets as well as the distribution of those assets. It is the combination of your choice of Trustee and your ability to craft the trust terms that makes a trust so beneficial when you have a problematic beneficiary.
Not only does a trust prevent distributing a lump sum inheritance to a beneficiary, but the trust terms can also be used to encourage the beneficiary to work on and improve the underlying problem. For instance, if the problem is a substance abuse addiction, your trust terms could provide payment for intensive inpatient rehabilitation and provide additional distributions if the beneficiary reaches important milestones after finishing the program. Likewise, if a beneficiary has a diagnosed mental health issue, the trust terms might pay for therapy. The beauty of a trust is that you can include terms that are carefully crafted to suit your needs and/or to address the issues of a beneficiary.
Do You Need Help with Problematic Beneficiaries?
Please join us for an upcoming FREE seminar. If you need help handling problematic beneficiaries in your estate plan, contact the Grand Forks trust attorneys at German Law by calling 701-738-0060 to schedule an appointment.
John grew up on a small livestock farm in west central Minnesota. He now lives in Grand Forks with his wife Maggie and their two daughters. In his free time John enjoys reading, taking his family to North Dakota and Minnesota state parks and rooting for all UND and Minnesota professional sports.
- IRS Confirms Grantor Trust Status Alone Does Not Cause a Step-Up in Basis - September 28, 2023
- What Counts as Income and Countable Resources for Medicaid Eligibility in North Dakota? - September 26, 2023
- Understanding the Uniform Transfer to Minors Act - September 21, 2023
