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Build a Fortress for Your Beneficiaries

Posted by Gregory Poulos | Mar 01, 2018 | 0 Comments

The question of how to leave your assets to your beneficiaries deserves considerable thought. For instance, outright distribution to a child with special needs can interfere with government benefits your child may be receiving. What about a child you know is not financially responsible … should you give them the assets outright, stagger the distribution method or set up a lifetime fortress or dynasty trust.

Let's take a look at all three methods…

Outright Distribution
This method is pretty straightforward … upon your death and after payment of expenses and debts, your beneficiaries receive their full share of the assets immediately. The advantages are that the assets can be folded into their own estate plans. The disadvantages may include some rather serious tax consequences depending on the size of the estate, and of course, that irresponsible child may blow through your assets with the speed of light.

The biggest issue for most families is that the kids (or their partners or spouses) will blow the inheritance in no time.

Staggered Distribution
In this scenario, you provide your child with a percentage of their inheritance at certain ages, dates or when certain events happen. For instance, when your child turns 21, they receive 1/3 of the inheritance, another 1/3 when they marry, and the final 1/3 when they reach age 40. You can also build in distributions of principal and income for things like a home down payments, educational expenses or even a monthly stipend for living expenses.

You may have seen the movie with James Garner's move The Ultimate Gift. In this film, a deceased billionaire leaves his spoiled adult grandson a series of tasks to perform to receive his inheritance. You can structure an “incentive-based trust” along the same lines as the movie. For instance, your child will receive ½ the inheritance when he or she graduates from college and the other half when he or she retains a full-time job for at least two years.

This structure allows you to prevent a beneficiary from having too much control of inherited assets until he or she is more capable of managing them. In addition, this is a good way to protect your child and your assets if he or she is having creditor issues or is going through a divorce.

While very popular, it is not always appropriate especially when you have young children. How much do you know about who your kids will be in the future when they are very young? You don't, so how can you make a decision about the “right age” to give a distribution?

Lifetime Fortress or Dynasty Trust
A third method of leaving assets to your beneficiaries is through a lifetime fortress or dynasty trust. In this scenario, your assets remain in trust for the beneficiary's entire lifetime. For instance, your child could receive distributions from your trustee for health, education and living expenses. Or for more protection, you require that all activity in the trust be done in the name of the trust so that the funds never leave it. This does mean more administrative expenses, but it does provide solid asset protection. Such a plan is not for every family, but every family should at least consider it.

Special Needs Trusts
If you have a special needs beneficiary or do not plan for the possibility that special needs might arise in the future, you put public benefits for that beneficiary at substantial risk with an outright distribution. With provisions for a special or supplemental needs trust you have a particularly useful tool. You can support their needs and yet not interfere with government benefits he or she may be receiving.

Whatever method you choose you should start by discussing all options with an experienced estate planning attorney. Each method has pros and cons that should be carefully weighed to meet your goals for your family, and also meet the needs of your beneficiaries.

About the Author

Gregory Poulos

Meet Greg PoulosAn Experienced Estate Planning & Business Attorney serving the Phoenix AreaGregory Poulos counsels clients on the best strategies for accomplishing their estate planning and business goals. Greg starts by “Putting His Clients at Legal Ease” so that they understand the legal issues...


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