Some people establish trusts to protect their assets or avoid tax obligations after they die. Others create trusts because they worry about the potential negative impact of a lump-sum inheritance.
Large inheritances can cause a variety of financial and legal complications that the testator creating an estate plan may not initially recognize. When beneficiaries are in challenging situations, creating a trust instead of drafting a simple will may be the best solution.
What circumstances make a trust particularly helpful?
1. Extreme medical challenges
Perhaps a beneficiary has had special needs since birth, or maybe they are currently undergoing cancer treatment. A large inheritance could affect benefit eligibility in some cases or could be at risk of medical collection efforts. A trust helps protect inherited resources and access to key benefits.
2. Substance abuse issues
People who have historically struggled with substance abuse could easily misuse what they inherit. Especially when triggered by the tragic loss of a loved one, those who have historically struggled with chemical dependence might relapse even if they have previously achieved sobriety. A trust can help prevent a loved one from misusing their inheritance.
3. An unhappy marriage
Technically, inherited resources are usually separate property. However, commingling inherited resources with the marital estate is relatively common and could put an inheritance at risk during a divorce. A trust limits direct access and thereby usually prevents claims of commingling.
Those trying to create estate plans that protect their loved ones instead of making them vulnerable may need to consider trusts in addition to other estate planning tools. Reviewing concerns about beneficiaries with an estate planning attorney can help people use the right tools given their unique circumstances.