All Articles

The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

You can choose to benefit a child or other beneficiary through one of two means: (1) through an “outright” gift, or (2) to an ongoing “testamentary trust” for the benefit of the child or other beneficiary.  We assist our clients understand the pros and cons of each approach, as it is critically important to understand the legal implications to your beneficiary of this decision.

Any assets allocated “outright” to a child become legally owned by the child following death.  This approach provides the child with the most flexibility possible, as the child could invest the assets, spend the assets, or give them all away, as he or she sees fit.  Along with that flexibility, however, comes certain risks.  These risks are as follows:

ü  Poor Stewardship: With an outright approach, the child would have the legal right to consume as much as he desired, even in the first few months or years following death. A testamentary trust allows your named Trustee to make decisions about the use and consumption of the inherited assets.

ü  Income Taxes: If a child were to become sole owner of IRA assets, the child could direct withdrawals from your IRA accounts, up to the entire amount.  By having another person serve as Trustee over the inherited IRA accounts, there may be a nature “check” against a child’s withdrawing IRA assets sooner than necessary, thereby saving on income taxes.

ü  Divorce: If a child receives an outright gift, then commingles those assets with a spouse before a subsequent divorce, the inherited assets may be subject to division with the divorcing spouse.  In contrast, the assets in a testamentary trust are not subject to a divorcing spouse’s claims.

ü  Death: If a child receives an outright gift, his or her estate plan (if any) directs the remaining assets following the child’s subsequent death.  In contrast, through the use of a testamentary trust, you could direct how any remaining assets in a child’s testamentary trust are to be distributed following the child’s subsequent death.