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For most people, the whole point of estate planning is to have control of the legacy they leave behind when they die. For those with substantial assets, complex family relationships or a desire to posthumously contribute to a charity, the creation of a trust is a common strategy for estate planning.
However, there are many different kinds of trusts, and the way that you structure a trust, as well as which people you name as beneficiaries, will impact how easily the trustee can manage the administration of your trust. There are certain issues that you may have to worry about impacting your planned legacy, including the risk of your family members divorcing or winding up in debt.
While you can’t control the fiscal and familial decisions of your family members, you can engage in careful estate planning practices to minimize the impact of their mistakes on your legacy.
In a standard last will, the heirs and beneficiaries receive a lump-sum benefit paid out from the estate. It is then the responsibility of the recipients to properly safeguard those assets from financial difficulty in the future.
One of the most common mistakes that people make with their inheritance is the decision to deposit it in a joint household account or to allow their spouse access to their inheritance. Once someone has commingled their inheritance with assets owned jointly in their marriage, their spouse will have a claim to a portion of that inheritance if they divorce. The creation of a trust can reduce the risk of that happening.
You can structure how and when your heirs can access the assets left behind for them. Although your loved ones can use trust funds for their cost-of-living expenses, they can’t deposit them into a joint account, leaving them less vulnerable to claims by a spouse in a divorce. While some heirs may find a trust frustrating because it will limit how and when they access the resources you leave behind, a trust offers them protection from long-term issues, including divorce, as well as debt problems in the future.
People who inherit a large amount of money may spend those assets frivolously, failing to consider both their tax obligations and how they may need those assets in the future. Other people can find themselves facing financial hardship through no fault of their own, potentially due to a motor vehicle accident or a serious illness, such as cancer.
Placing the assets you want to leave behind for your loved ones in a trust limits the ability of creditors to go after those assets in the future. In fact, in some cases, a trust can protect your loved one by helping them qualify for state benefit programs, such as Medicaid, when they need substantial medical care.
The right kind of trust can protect the assets, funds and legacy that you want to leave for the people you love. A trust gives you more control over the use of the assets you leave behind and protects your loved ones from the loss of those assets through divorce or creditor collection efforts.