Benefits of a Beneficiary Trust - New Mexico & Arizona Attorney Gives the Details

Passing your assets to the people that mean the most to you (your “beneficiaries”) is a critical aspect of your estate plan.  You have worked very hard to accumulate your assets, so it makes sense that you will want your beneficiaries to have the use and enjoyment of what you leave to them!  However, there are times when giving someone money is not a good thing.

Let me explain…

I have had several clients whose parents had recently passed away.  In each case, the parents had a Will, leaving their modest estate equally among the children (the parents were not clients of MH, but we were able to help the children with administering the estate).  The administration and distributions seemed to be straight forward, until we started to dig a little deeper.  Three major issues were uncovered in these various cases (all that could have been easily avoided):

1)      One of the children had died before the parents.  The language in the Will provided that his share would pass equally to his children.  He had a 25-year-old daughter and an 18-year-old son.  His share was $50,000, so each of his two kids received $25,000.  His daughter, upon receiving her share, invested the money with the aspiration of buying a home in a few years.  But his son used the money to buy a new sports car!  The $25,000 was just a down payment. Because of the high cost of the car, the son was unable to make the high monthly payments, despite having put $25,000 down.  This young man was forced to sell the car at a great loss from depreciation.  Now that portion of the inheritance is gone, with nothing to show for it.  We know from experience that this behavior is not unusual when a young adult is given a large sum of money, often from inheritance.

2)      In another case, one of the daughters was on government assistance which has certain asset and income requirements she has to meet in order to maintain her eligibility.  When her parents died, she inherited $20,000.  This money put her above the asset levels for eligibility, so she was removed from the program.  The $20,000 was quickly spent to pay for her living expenses and medication.  The good news is that she can now reapply for the program (we are hoping that they are still taking new applications).  The bad news is that the entire inheritance is gone, and she is left worse off than before due to receiving the well-intended funds.

3)      Shortly after receiving his inheritance of $35,000, the child in the third case was served with divorce papers.  Because he is fromArizona(a community property state), and the money was deposited into his joint account, his soon-to-be ex-wife will be taking $17,500 from that money!

In all three cases, the parents did not have large estates, so they did very little planning.  But because of this misconception, the people they chose to use and enjoy the money did not get to.  All they needed to do was to have a trust that contained well drafted beneficiary trusts.  That is, a trust for the beneficiaries’ inheritance drafted within their own trust.

In case one, if a beneficiary trust was used, then age and use restrictions could have been placed around the receipt of the money.  By placing such restrictions on the receipt of the inheritance, it makes certain that the money will be used in a more productive and beneficial way.  Keep in mind that the funds would be available to that beneficiary for things such as school, but he could not “blow it” on a sports car.  In fact, you can even create a sort of rewards system to encourage wise spending and achievement.  You can divide the distributions and have them be given for specific uses or after set achievements, such as buying a home, paying for college, graduating from college, receiving good grades or even holding a job for a set period of time.  These methods help in situations where the beneficiary may be a spendthrift or simply too young to appreciate the value of the gift they have received.

In the second case, the inheritance should have gone through a supplemental needs trust – to supplement any government assistance, and not to supplant it.  This would help ensure that any money received would be there to help out and make life more enjoyable, but would not cause the beneficiary to be removed from government assistance that they greatly need.

A well drafted beneficiary trust will also help in the third case, and prevent a soon-to-be ex-spouse from getting money that you left to your child. By keeping the inheritance “locked away” from the marriage community, those funds stay with your child in the case of a divorce.  Remember that the money is still available for your child to spend it on the spouse or children, but while it is being “invested,” it is protected in that worse case scenario.

At Morris Hall, we want to make sure the assets you pass along are protected and available to the people that you want to have it.  We will work with you to create the beneficiary trusts to get your assets to WHO you want, WHEN you want them to have it, and HOW you want them to receive it.

Contributed by Attorney James P. Plitz

About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, powers of attorney, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Tucson, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.