Planning Issues with Adult Beneficiaries
1. What methods are available to give inheritance to an adult beneficiary?
There are three primary methods for the distribution of inheritance to an adult beneficiary.
2. Can outright distribution be deferred for a beneficiary who is older than age 21?
Yes, with a trust. For example, Parent’s estate plan might direct outright distribution, provided Child is at least age 30. If Child has not attained age 30 at the time of Parent’s death, Child’s inheritance would be managed by a third party trustee in a general needs trust until Child attains age 30.
3. How does a General Needs Trust work?
A general needs trust can be configured in several different ways. For example:
4. May distributions of trust principal be paid in stages?
Yes. A general needs trust may be configured to pay out principal in stages. There are two approaches to consider. First, the trust might distribute principal in stages by age. For example, 1/3 at age 25, 1/2 at age 30, and all remaining assets at age 35. Second, the trust might distribute principal in stages by time. For example, 1/3 at the parent’s death, 1/2 five years later, and all remaining assets ten years later.
Both approaches give the beneficiary a second or third chance to handle the inheritance responsibly, even if the beneficiary fails to do so at first. Under the first approach, two beneficiaries would likely receive their distributions at a different time, because they are different ages. Under the second approach, two beneficiaries would receive their inheritance at the same time regardless of age difference. The choice depends on personal preference.
5. Who should serve as trustee of a general needs trust?
If a beneficiary is young, irresponsible, immature, or inexperienced handling large amounts of money, a third party trustee should be considered. Depending on many factors, the third party trustee might be a close family member or friend, a bank or trust company, or maybe a professional advisor. A third party trustee can enforce the terms of the trust while protecting its assets from creditors and predators.
While it is common for a mature, responsible beneficiary to serve as trustee of his or her own inheritance protection trust, it may also make good sense to name an independent third party trustee. The third party trustee may be better equipped to manage investments, file tax returns, and protect the trust assets in the event a threat arises against the beneficiary.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.
There are three primary methods for the distribution of inheritance to an adult beneficiary.
- Outright. The simplest method is to leave inheritance outright and free of trust. Whether the transfer is accomplished by Will, living trust, or beneficiary designation, this option is straightforward and gives the beneficiary full control of the inheritance immediately.
- General Needs Trust. An alternative method is to leave inheritance in trust for an adult’s benefit. Trusts are very flexible in their design. A general needs trust is usually drafted to permit distributions of income and principal for the beneficiary's health care, education, support, and maintenance until the beneficiary attains a specified age. A general needs trust might name a third party trustee (aka "restricted trust") or name the beneficiary as trustee (aka "protected trust" or "beneficiary controlled inheritance protection trust"). For example, a common design option is to restrict inheritance in a general needs trust for beneficiaries under age 25 and protect inheritance in a general needs trust for beneficiaries over age 25.
- Supplemental Needs Trust. This type of trust is used when it is important to leave inheritance in a manner that maintains the adult beneficiary's qualification for government health or supplemental income benefits (for example, SSI or AHCCCS or ALTCS). A supplemental needs trust is also referred to as a special needs trust.
2. Can outright distribution be deferred for a beneficiary who is older than age 21?
Yes, with a trust. For example, Parent’s estate plan might direct outright distribution, provided Child is at least age 30. If Child has not attained age 30 at the time of Parent’s death, Child’s inheritance would be managed by a third party trustee in a general needs trust until Child attains age 30.
3. How does a General Needs Trust work?
A general needs trust can be configured in several different ways. For example:
- Income only. The beneficiary receives all trust income, but no distributions of principal are permitted. This option may be customized to permit staged principal distributions when the beneficiary attains specified ages (for example, ages 25 and 30).
- Unitrust payment. The beneficiary receives a specified percentage of the trust principal each year, recalculated annually.
- Discretionary income and principal. The trustee has discretion to distribute as much income and principal as the trustee deems necessary or advisable for the beneficiary’s health care, education, support, and maintenance. This option may be customized with additional guidelines if desired. This design option provides optimal protection from threats against the beneficiary.
4. May distributions of trust principal be paid in stages?
Yes. A general needs trust may be configured to pay out principal in stages. There are two approaches to consider. First, the trust might distribute principal in stages by age. For example, 1/3 at age 25, 1/2 at age 30, and all remaining assets at age 35. Second, the trust might distribute principal in stages by time. For example, 1/3 at the parent’s death, 1/2 five years later, and all remaining assets ten years later.
Both approaches give the beneficiary a second or third chance to handle the inheritance responsibly, even if the beneficiary fails to do so at first. Under the first approach, two beneficiaries would likely receive their distributions at a different time, because they are different ages. Under the second approach, two beneficiaries would receive their inheritance at the same time regardless of age difference. The choice depends on personal preference.
5. Who should serve as trustee of a general needs trust?
If a beneficiary is young, irresponsible, immature, or inexperienced handling large amounts of money, a third party trustee should be considered. Depending on many factors, the third party trustee might be a close family member or friend, a bank or trust company, or maybe a professional advisor. A third party trustee can enforce the terms of the trust while protecting its assets from creditors and predators.
While it is common for a mature, responsible beneficiary to serve as trustee of his or her own inheritance protection trust, it may also make good sense to name an independent third party trustee. The third party trustee may be better equipped to manage investments, file tax returns, and protect the trust assets in the event a threat arises against the beneficiary.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.