Hinshaw Estate Planning Blog

Wednesday, December 7, 2016

The Dangers of Outright Distributions, cont'd.

There are significant benefits to passing property in trust to children and other beneficiaries rather than distributing the property outright.  Property left to a child or other beneficiary in a correctly designated trust will be seen as owned by the trust rather than the individual beneficiary.  The beneficiary may be a co-trustee of the trust, have the use of the trust assets and income to maintain lifestyle, and control the investment of the trust property, but the property will still be protected from the beneficiary’s creditors, including a failed marriage, or the creditors of your beneficiary’s spouse.

When property is left outright to children or other beneficiaries, all in a single lump sum, that property may or may not be invested wisely depending on the choices the beneficiary makes. If the beneficiary is free to make decisions with respect to the entire amount left to the beneficiary, then one mistake could cost that beneficiary his or her entire inheritance. One way to avoid this difficulty is to leave property in trust, at least for a period of time, and then allow payouts to be made on an installment basis. That way only the portion of the property that is distributed free of trust would be lost because of a poor investment choice or because the beneficiary was scammed by an unscrupulous person. The property which remains in trust, if it is properly designed, will have a Cotrustee to prevent this sort of tragedy form occurring.

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