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The Wealth Counselor
Potential Perils of Outright Distributions and Gifts

Murphy's Law applies itself with surprising regularity in the estate planning field.  If your clients are leaving outright no-strings-attached inheritances or gifts to their beneficiaries, they are taking a risk. But there is a solution. A lifetime discretionary trust (general needs trust) protects a client’s beneficiaries and provides continuity of asset management.

How Beneficiary Planning Benefits Your Client and Your Practice

An inheritance that goes outright to a spouse, child, or grandchild will be more likely to leave your office. On the other hand, an inheritance left inside a trust (such as a lifetime discretionary trust, more on that below) has a better chance of staying because:

  • If assets managed by you are left outright, they can be easily transferred;

  • You have time to build relationships with the beneficiaries while your client is still alive and well; and

  • Your client may be inclined to recommend the trust be managed by you since you are already one of your client's trusted advisors.

A lifetime discretionary trust can ultimately position you as the trusted advisor for your client and your client's heirs.  This provides a continuity of asset management that will benefit you, your client, and your client's heirs.

What Can Go Wrong with Outright Distributions or Gifts?

There are many perils with outright distributions or gifts. Here is a short list of what can (and, in many cases, will) go wrong:

  1. Judgment creditors can seize or garnish a beneficiary’s inheritance to satisfy their claim (even if it is a “frivolous” lawsuit);

  2. Bankruptcy courts can seize a bankrupt beneficiary’s inheritance to pay creditors and costs;
  3. A divorce court might award some or all of a beneficiary’s inheritance to a soon-to-be ex-spouse; or
  • The beneficiary may simply squander his or her inheritance.

Many clients are unaware of these and other risks of outright distributions or gifts.


What is a Lifetime Discretionary Trust?

A lifetime discretionary trust (or general needs trust) is the solution to the problems created by outright distributions or gifts. It is a mechanism that allows clients to pass assets to beneficiaries in continued trust or with staged distributions, such as one-third at 30, one-third at 35, and the remainder at 40.

Two points about lifetime discretionary trusts. First, these trusts are a feature in a client’s estate plan. After a client’s death, the trust holds assets for the next generation, while providing direction and control during the entire lifetime of at least one successor generation. In this way, they are similar to dynasty trusts.

Second, these trusts are discretionary in that successor trustees are not required to distribute income and/or assets in rigid ways. Instead, they give successor trustees the power, within limits, to adjust the timing, direction, and percentage distributions of income and assets in light of contingencies that could not have been known at the time the trust was initially funded (often at the death of the client). For example, maybe one of the children or grandchildren is a spendthrift, has a substance abuse problem, or has special needs. The discretionary element allows distribution flexibility for that person.

Lifetime Discretionary Trusts Are Not For Everyone

Even though lifetime discretionary trusts offer many benefits, they are not for everyone. The smaller the value of the trust, the more expensive it will become to maintain over time. Things that should be considered include the beneficiary’s age, the value of the assets that will be used to fund the trust, and the expenses involved in managing the trust during the beneficiary’s entire lifetime.

Identifying when a discretionary lifetime trust will benefit a client’s spouse, child, or grandchild is relatively easy. Knowing when the benefits outweigh the long term cost is more difficult. Call us if you have any questions. We are always available to help and look forward to working with you and your clients.

Sound Estate Planning, PLLC • 152 3rd Ave. South, Ste. 107 • Edmonds, WA 98020 • (425) 967-7287