Understanding beneficiary controlled trusts

 Posted on November 22, 2021 in Estate Planning / Probate

If you have a substantial amount of money to leave your family in your estate plan, it's often wise not to leave it to them in a lump sum. This can have significant tax implications for them. If you have more than one child, they may each benefit from having a different type of trust, so it's a good idea to learn about the various types.

So-called "spendthrift trusts" are often used for people who need some supervision when it comes to money. A spendthrift trust is managed by a trustee who disburses money based on your instructions or (if you designate) at their own discretion. This kind of trust also protects a beneficiary's inheritance from being taken by creditors, plaintiffs in a lawsuit or a spouse in a divorce. That's because they don't legally have any control over the money.

A beneficiary controlled trust offers flexibility

What if you have a child or other family member who doesn't have these issues – at least for now? You can set up a beneficiary-controlled trust. That's essentially what it sounds like. The beneficiary is the trustee and has control over how the assets in the trust are invested as well as how much they withdraw from it and when.

However, if a potential risk arose, such as problems in their marriage or a potential lawsuit, the beneficiary could resign as trustee, choose a trusted person or entity to manage the trust and give up direct control of the assets. You might also want to consider adding a trust protector who could take control of the trust if they became concerned that the assets could be lost to one of someone outside the family.

One of the primary goals of establishing an estate plan is to protect the assets you've worked hard to accumulate or that have been handed down to you from previous generations. Choosing the right trusts and other estate planning tools and the appropriate people to manage them is crucial to achieving that goal.