When most people think about leaving assets, they assume that it has to be done in one fell swoop. In actuality, there are several ways that you can leave assets. For young adults, it may be better not to leave assets outright as they might not yet have the maturity to properly manage it. Here are the 3 different ways that you can leave assets to adult beneficiaries.
Leaving Assets as a Lump Sum
The most common way that people leave assets to adult beneficiaries is as a single lump sum. This means that after all estate debts and taxes are paid, whatever remains goes fully to the adult beneficiaries. Before taking this approach, ask yourself…
- Do my beneficiaries have the maturity and skills to manage a large sum of money? Imagine an 18 year old receiving a large sum of money. How likely will those funds be squandered instead of being used to support him/her for an extended period of time?
- Is there any risk that my beneficiaries will lose part of their inheritance (i.e. in a divorce or lawsuit)?
- Will a lump sum inheritance negatively impact my beneficiaries (such as through additional tax liabilities)?
There are some instances, such as those noted above, where it might not be in your beneficiaries’ best interests to receive a lump sum inheritance.
Trusts with Gradual Distribution
Rather than leave assets to adult beneficiaries as a lump sum, you can have it disbursed in stages. For instance, your beneficiaries can receive a certain percentage at different ages. This gradual distribution ensures that your beneficiaries will continue to have access to funds to support their education and living expenses at different stages of their life. Eventually, the full distribution will occur.
There is one caution with utilizing this approach. If any of the concerns listed above might apply to your beneficiary, this option only provides a temporary protection. The inheritance becomes exposed once any portion is distributed to the beneficiary.
Discretionary Lifetime Trusts
There is a third option that is similar to the second, but with some added benefits. There’s something called a discretionary lifetime trust. This trust exists somewhat as its own entity and would therefore be shielded from the life circumstances (divorce, lawsuit, etc.) of your individual beneficiaries. If your initial beneficiaries die, the trust can go on to benefit other family members or future generations. A third party of corporate entity can be the trustee, or one of your beneficiaries can be named trustee once he/she has reached a certain age (that you specify).
Choosing Which Way to Leave Assets to Adult Beneficiaries
Your beneficiaries, their families and their financial circumstances are unique. Fortunately, you can leave assets to adult beneficiaries in a way that maximizes the benefits to them while minimizing risks. The above is merely one of many components of a proper estate plan.