You may have concerns about leaving a direct, lump-sum inheritance to a loved one that is not a very effective money manager. This person may have turned to you when they were having financial difficulties over the years, and at some point, you will not be around to provide assistance.
Generally speaking, if you use a living trust as your sole estate planning device, the executor would distribute the bequests all at once. Fortunately, there is a viable alternative in the form of a revocable living trust.
Anatomy of a Trust
When you establish a revocable living trust, you would be called the grantor of the trust. The trustee is the individual or entity that will administer the trust, and the beneficiary is the person that will receive monetary distributions.
While you are living, you would act as the trustee and the beneficiary, so you would maintain complete control of the assets. Since the trust is in fact revocable, you could rescind it at any time, so your control would be absolute.
In the trust declaration, you name a trustee to succeed you after your passing. This can be someone that you know personally, but there is another option.
Trust companies and the trust departments of banks provide trustee services, and this can be a better choice in some instances. The family member that will be receiving the inheritance would be the beneficiary after you are gone.
You would include a spendthrift provision when you establish the living trust. The beneficiary would not have direct access to the principal; the trustee would hold the purse strings.
Creditors of the beneficiary would “step into the shoes” of the beneficiary, so the creditors would be in the same position. They would have no access to the funds that are still in the trust.
This provides a strong layer of protection, but it should be noted that creditors could go after assets that have been distributed to the beneficiary. For this reason and others, you would probably want to instruct the trustee to distribute limited assets on an incremental basis over an extended period of time.
Other Living Trust Benefits
There are other reasons to use a living trust even if you do not have any concerns about a spendthrift heir.
If you use a will, it would be admitted to probate, which is a costly and time-consuming legal process that strips you and your family of privacy. On the other hand, when a living trust is used, the probate court would not be involved in the administration process.
The trustee would walk into a turnkey situation because the assets that comprise the estate would be held by the trust. Another benefit is the ability to name a disability trustee to manage the trust in the event of your incapacity.
There is total flexibility beyond the power of revocation. You can change the terms at any time, and you can convey property into the trust after it has been established.
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