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How To Leave Money to Beneficiaries Who Can't Manage It

By Catherine Hodder, Esq. on May 19, 2022 12:00 PM

Who wants to leave their money to someone who can't handle it? If any beneficiaries in your estate plan are minors or have physical or intellectual disabilities, you may want to set up a testamentary trust.

One of the more complicated areas of estate planning involves trusts. However, they are an effective estate planning tool if used properly. Consider including a testamentary trust in your will if you have any concerns about your beneficiaries being unable to manage an inheritance.

What Is a Testamentary Trust?

A testamentary trust is a provision outlined in a last will and testament naming a trustee (often the personal representative) to hold assets in trust for specific beneficiaries. A trust that you create would come into effect after you pass away and your estate goes through probate.

In a testamentary trust, the grantor, or settlor, is the trust maker. The trustee is the one who manages the trust property and distributes the funds according to your instructions in the trust provision of your will. The trustee also reports to the probate court. The beneficiary is the recipient of the trust's property.

Differences Between Testamentary Trusts and Living Trusts

You can update or change a testamentary trust by changing your will, as long as you are of sound mind. When you die, your estate goes through probate. At that point, the testamentary trust becomes effective and is irrevocable. It will contain the remaining assets from the estate after debts and other expenses are settled.

A living trust, also called a "revocable trust," is effective once you sign the trust document, and it continues until you revoke it or die. You may change it anytime during your life. When you place assets in the living trust during your lifetime, it makes the trust the property owner. Property titled in the trust's name, such as real estate, does not go through probate.

Why Would You Use a Testamentary Trust?

Provide for Minor Beneficiaries

The most popular reason to make a testamentary trust is if you have children who are too young to inherit your estate. Because children under 18 can't receive money directly, they need an adult to manage it for them.

In your testamentary trust, you can nominate the person who will manage the trust assets (the "trustee") for the benefit of your children and distribute it to your children when they are 18 or another age you designate. Some parents choose to give their children inheritances at 21 or 25.

Appoint a Money Manager

Another benefit of having a trustee to manage the assets is if your designated guardian of your children is not a good money manager. For example, your sister is great with your kids but not with money. However, your brother is great with money but not an ideal guardian. Therefore, you can name your sister as your children's guardian and name your brother as trustee over their money.

So, in this scenario, your sister cares for the day-to-day needs of raising your children. Your brother manages the money and distributes it regularly to your sister for your children's support, health care, and education.

Stretch Out Inheritance

You may not want your beneficiaries inheriting one lump sum. Legally your child may receive your whole estate at age 18, but should they? Many parents opt to spread out the distribution of the assets in stages.

For example, they may give their children one-third of the assets at age 25, one-third of the assets at age 30, and the final one-third of the assets at age 35. There is less risk of a child blowing their entire inheritance this way.

Manage Problematic Beneficiaries

Your beneficiaries may have problems with drug, alcohol, or gambling addictions. Or they might be in debt and unable to manage money. Your trustee will hold the assets for your children and provide funds when needed.

Protect Beneficiaries with Special Needs

If your child has special needs and receives disability benefits from the government, receiving a sum of money may jeopardize their benefits. Planning for children with special needs is complicated, so talk to an attorney specializing in trusts to set up a "special needs trust" for your family's situation.

Whether you use an estate planning attorney or Findlaw Legal Forms & Services to draft your will, consider a testamentary trust provision in your will.

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