Controlling the inheritance from the grave: good or bad?

The decision on how and when to leave an inheritance is an important and often stressful decision.

An elder generation member will often feel like they don’t want to “control from the grave” by restricting an inheritance, while simultaneously feeling their beneficiaries may not be mature enough to handle the inheritance.

Additional issues arise if an intended beneficiary is in an unstable marriage, has (or may have) legal issues, special needs, or a substance abuse issue.

Young beneficiaries

If a person you intend to leave assets to in your will or trust is “young” (I’ll let you define that!) and you are concerned they will not make good choices with the assets they inherit, you do not do them any favors by ignoring your own instincts. Receiving an inheritance is a privilege; it is, quite literally, a gift. You are free to decide the terms of the gift. With the right terms, a trust for their benefit can certainly be doing your heirs a favor.

Consider maintaining the inheritance in your trust after your death. The trustee can be directed to distribute a certain percentage at certain ages. For example, the beneficiary will receive one-third of their inheritance at age 25, one-half of what remains at age 30, and all of it at age 35.

In the years before the beneficiary receives all their inheritance, the trustee can be directed to make distributions for the benefit of the beneficiary for “health, education, maintenance, or support” or for whatever reasons you set forth (for example, $X for a first wedding, $Y upon graduating college, $Z toward a down payment on a first home).

The idea is that if the beneficiary does make poor decisions initially, there will be a second and even a third chance to manage assets responsibly when the later distributions are made.

The larger the inheritance is, the more a staggered distribution schedule makes sense. You don’t necessarily need to leave $50,000 spread out over ten years. Similarly, you wouldn’t want to dump $500,000 on an eighteen-year-old—especially one that just lost their parent(s). And remember, the funds can still be used for the heir’s benefit; it’s just that a trustee will be deciding when and how that occurs (based on the terms in your trust).

Beneficiaries with special needs

If your beneficiary has special needs and may one day need “needs-based “government assistance, you will want to leave their inheritance in a “special needs trust” so the beneficiary is not disqualified from receiving government benefits. There are restrictions that apply, so please see legal counsel if you have a special needs beneficiary.

Beneficiaries with other issues

A trust with staggered distributions or distributions only for certain reasons (over the beneficiary’s lifetime) should be considered for beneficiaries with substance abuse problems, an inability to handle finances, shaky marriages, excessive spending habits, creditors, or potential creditors.

The trust, with the right trustee, can protect the assets from being spent unwisely, attached by creditors (including ex-spouses), or wasted away. Again, you’re not “controlling from the grave.” You’re giving a gift with the best chance of benefiting your beneficiary for the long run.

Other options

Another option for structuring your trust for long-term success is a lifetime trust that allows the beneficiary to become their own co-trustee or sole trustee at certain ages.

For example, if the beneficiary is 23 when they are to inherit, the trust can say the assets won’t be distributed outright but rather will be managed by a trustee (as named in your trust) for the beneficiary’s lifetime.

However, at age 30, the beneficiary may become a co-trustee of the trust—giving the beneficiary the opportunity to “learn the ropes” of investing, managing assets, making distributions, and following the terms of the trust. Then, continuing the example, at age 35, the beneficiary may become the sole trustee.

This structure not only provides the training and maturity needed but keeps the trust assets separate property of the beneficiary, offers some creditor protection, and can provide terms for what should happen when the beneficiary passes away or becomes incapacitated.

Charitable beneficiaries

Donors are also sometimes reluctant to leave a large donation to a charity in their will or trust. The fear is that the charity may not be the same organization when the donor passes away as it was when the trust was signed. What if the charity no longer exists or the donor no longer agrees with the charity’s mission?

Instead, consider leaving a gift to a charitable donor-advised fund at your local community foundation (or through your financial institution). You can leave a sum of money (or other assets) that is then held by the fund and distributed over a period of years (or perpetually if it’s an endowment) to charities named by the advisors.

You name the advisers (for example, your children or grandchildren) and the types of charities you mean to benefit. The advisers, working with the community foundation, can then determine annually what charities meet the parameters set forth in your gift, and how much should be distributed. Your legacy will live on just as you intended.

Setting up your beneficiaries for success is not controlling from the grave. It’s your legacy. You deserve to put it in good hands and have it last. They’ll thank you eventually.

Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild.” Reach her at [email protected]