Opinion: Putting strings on inheritance
Most people plan to give their assets to their loved ones immediately when they die. But sometimes this is not a good idea.
For example, the “beneficiary” (person who gets the gift) may not be able to handle the gift. Maybe they are minors or facing bankruptcy, divorce, addiction or medical problems or maybe they just can’t handle money.
Or perhaps some of the assets should be held for future generations. One way to handle such situations is through a trust. A “trustee” (person in charge) is chosen to make the gift at a later time. But how much “discretion” (choice) should be given to that trustee?
Sometimes the beneficiary is given more than one “bite at the apple.” For example, the beneficiary could receive the gift in three parts, 5, 10, and 15 years after the death.
One problem is this prevents the trustee from adjusting the gift as may be needed based on change of circumstances. For example, if at the time for distribution it would be bad for the beneficiary to get the gift.
Sometimes strings are attached like matching earned income, a lump sum on earning a college degree, or a gift upon the birth of a baby, to encourage behavior. Sometimes strings like sobriety tests or drug tests are attached to discourage behavior. The problem is that circumstances change and there is little room for adjustment.
Typically the trustee is given discretion to give income and principal to the beneficiary as needed for “health, education, maintenance and support.” The problem is that beneficiaries and their creditors can harass and sue the trustee for not coughing up enough money.
Sometimes other resources of the beneficiary are taken into account before a gift is made. This can discourage gainful employment and saving for retirement.
Sometimes the beneficiary is kept in their “accustomed standard of living.” This can cause extravagant spending for one beneficiary and trap another beneficiary in poverty.
The best way to allow the trustee to adjust for changed circumstances and to avoid lawsuits is to give the trustee complete discretion. The trustee could choose to give some, all, or none of the gift to the beneficiary at any time. Obviously, the risk here is that the trustee will abuse this discretion.
Even where the trustee has complete discretion, a court sometimes decides the trustee has abused that discretion by looking at 1) the amount and nature of discretion given, 2) the intent of the person who died, 3) the motives of the trustee, and 4) any conflict of interest.
So if you need to put strings on an inheritance, the moral of the story is to choose your trustee and successor trustees carefully, but to give the trustee complete discretion to avoid lawsuits.
Frank W. Spees Jr., J.D., MBA, is an Incline Village estate planning Attorney who has limited his practice to wills, trusts and estate planning for 30 years. Frank practices law with his wife, attorney Judith A. Spees and his daughter, attorney Kristen C. Spees. His son, Justin J. Spees works with the firm as a trust paralegal. Visit http://www.spees.com to learn more.