Structuring an Inheritance

Structuring Your Legacy

“How do you want your beneficiaries to receive their inheritance?”

Deciding how to leave your assets to your heirs is one of the most difficult and misunderstood aspects of estate planning. We would argue how you structure your beneficiaries’ inheritance is equally as important as determining what assets you want to leave your beneficiaries. Many clients believe that a trust is established only to avoid probate and distribute your assets outright to your beneficiaries in an orderly manner. However, this is only one distribution method among many others that clients may not know are available within their estate plan.

Structuring an inheritance for your beneficiaries is up to your imagination and it is important that you discuss ALL of your options with a qualified estate planning attorney. Our goal is to make sure you are properly educated, so when you see your attorney, you are empowered to make an intelligent decision in the best interest of your family.

We have broken down three common distribution methods to help you determine how you want to structure your legacy.

1) Outright Distribution | Trust Settlement

Your successor trustee would distribute assets outright to your beneficiaries in their name. Your beneficiaries would become the legal owner of the distributed assets. Assets can be distributed in cash or in kind, which means you can either transfer the “asset” or liquidate the asset and transfer cash.

Advantages:

This may be an appropriate strategy if your beneficiaries are mature and responsible with money.
Your trustee will settle the trust and charge a one-time fee which may result in fewer trustee fees than continuing the trust.

Disadvantages:

This is not an appropriate strategy if your beneficiaries are irresponsible with managing money.
- The average inheritance is spent within 12-15 months.
- It takes the average recipient of an inheritance 19 days before they buy a new car.
No asset protection or divorce protection. Once an asset is distributed to a beneficiary and they become the legal owner, that asset may be subject to potential creditors, including a divorcing spouse.
If your beneficiaries are minors, an outright distribution may result in guardianship until the beneficiary reaches age of majority (18 or 21).
No tax savings. A trust may provide state income tax or estate tax savings. Distributing the inheritance outright rather than leaving it in trust takes these potential savings off the table for beneficiaries.

2) Staggered Distribution | Distribution at Age Intervals or Life Events

Your successor trustee would distribute a portion of your assets to your heirs when they reach the ages of 25, 30, and 35. Staggered distributions can also be made when your beneficiaries reach a major milestone such as getting married or graduating from college or trade school. We have even had trust documents that require distributions to match a beneficiaries' W-2 income.

Advantages:

May prevent younger beneficiaries from becoming overwhelmed by receiving a large sum of money at one-time.
Instructs your trustee to distribute lump sums of money over time as your beneficiaries age and mature.
If your beneficiary spends their first tranche of money, they have another opportunity to learn how to manage their second and third tranche of money.
Can incentivize beneficiaries to reach certain milestones in their life.

Disadvantages:

No asset protection or divorce protection. Once an asset is distributed to a beneficiary and they become the legal owner, that asset may be subject to potential creditors, including a divorcing spouse.
No tax savings. A trust may provide state income tax or estate tax savings. Distributing the inheritance outright, even at staggered ages, rather leaving it in trust takes these potential savings off the table for the beneficiaries.

3) Assets held in trust | Dynasty Provisions

Your successor trustee would be required to keep assets in trust for the beneficiary’s lifetime or as long as state law allows. In Nevada, a trust can last 365 years, commonly referred to as a “dynasty trust.” Keeping assets in trust is so powerful because it allows the beneficiaries the right to “use and enjoy” the trust assets without owning the assets in their name.

Advantages:

Your beneficiaries can serve as the sole trustee of their respective trust (i.e., Beneficiary Controlled Trust). This way they have all the rights they would have had if they owned the assets outright, but they would have many of the tax and creditor protection benefits of a trust.
You can have your beneficiary serve as co-trustee with a corporate trustee. The beneficiary can be their own family trustee with the power to direct the investments, and the corporate trustee can handle the distributions and books and records for the trust. This allows your beneficiary full control over the investments inside the trust while leaving the day to day administration tasks to the corporate trustee.
Distribution can be fully discretionary by your distribution trustee. This creates the best asset protection and divorce protection for your beneficiaries.
You can request your trustee to be very liberal or strict with distributions.
The trust can purchase assets for your beneficiary in the name of the trust instead of making a distribution to your beneficiary to buy the assets in their name. This way the assets are now an asset of the trust and not subject to any potential predators or creditors of your beneficiaries, including a divorcing spouse. Remember Nelson Rockefeller’s quote, “The secret to success is to own nothing, but control everything.”
Assets have the ability for compound growth when they are properly invested in trust instead of distributed outright to beneficiaries.
Assets held in trust would not generally be subject to estate taxes when the beneficiary dies, thereby maximizing the amount passing to future generations.