Beneficiaries
When deciding who will benefit from your trust, it’s natural to think about your immediate family or loved ones. However, it’s equally important to consider unique and uncommon scenarios that could impact your decisions and the long-term success of your estate plan. Let’s dive deeper into some questions that can help you think through your beneficiaries, including potential challenges and overlooked situations.
1. Who Are Your Primary Beneficiaries?
Most people select children, close family members, or a beloved organization. But also think about:
Family dynamics: Are all your beneficiaries equally responsible with money? Would any of them need guidance or financial protection?
Non-traditional beneficiaries: Do you have close friends, extended family, or even pets that you’d like to provide for?
Charitable causes: Would you want part of your estate to support a cause or charity that is meaningful to you?
2. Who Are Your Contingent Beneficiaries?
Contingent beneficiaries receive the assets if your primary beneficiaries predecease you. It’s easy to overlook this, but ask yourself:
Extended family or loved ones: Do you want nieces, nephews, or other relatives to inherit if your immediate family cannot?
Organization or foundation: Would you want your estate to go to a charitable organization if no family members are able to inherit?
Back-up planning: How will you ensure there’s always a clear line of succession for your assets, even after your primary beneficiaries?
3. Considering Life Changes
Life events like marriage, divorce, or the birth of children can drastically impact your trust. Some things to think about:
Marriage and divorce: Should your assets be protected in the case of a beneficiary’s divorce or marriage? For example, would you want your child’s inheritance protected from their spouse in a divorce?
New children or family members: If you have more children, stepchildren, or grandchildren, will they automatically be included in your trust, or will you need to update it?
Changing relationships: As relationships evolve, are there individuals you once included in your trust that you no longer want as beneficiaries? Or someone new you want to add?
4. Excluding Beneficiaries
Deciding to exclude someone from your trust can be a difficult but necessary choice. Here are some uncommon situations to consider:
Family members with addiction or legal issues: Would you want to protect your estate from being squandered due to a beneficiary’s substance abuse or legal problems?
Estranged relationships: If you’ve had a falling out with a family member, is there a risk they could challenge the trust or try to inherit against your wishes?
Conditions for inclusion: Should a beneficiary meet certain conditions (e.g., completing college, staying out of trouble) to receive their inheritance?
5. Unforeseen Changes in Circumstances
Life is unpredictable, and you’ll want to prepare for different scenarios. Ask yourself:
What if a beneficiary passes away before they receive their inheritance? Who will inherit their portion?
What if a beneficiary develops a disability or loses the capacity to manage their own affairs? Should you set up a special needs trust or appoint a financial guardian?
What if a beneficiary wins a lottery or inherits a large sum elsewhere? Will you still want to give them the same portion of your estate?
Scenario 1: Kate’s Marriage and the Impact on Her Inheritance
Imagine you have a daughter named Kate. She’s recently married, and you’re thrilled for her. Her spouse seems kind, and they share a strong bond. Naturally, you want Kate to benefit from your trust, as you’ve always envisioned leaving her a portion of your estate to provide financial security. However, there’s something in the back of your mind—Kate’s marriage introduces another layer of complexity to her inheritance.
You’ve noticed that while Kate and her spouse are happy now, her spouse is not as financially responsible as Kate. There have been a few red flags, such as overspending or racking up significant credit card debt. You start to wonder: What happens if Kate’s marriage takes a turn for the worse? What if there’s a divorce down the road?
Without protections in place, Kate’s inheritance could become part of a messy divorce settlement, potentially being divided with her spouse. If the assets aren’t protected, Kate might end up losing a substantial portion of her inheritance—something you intended for her benefit alone.
Reflection
When thinking about Kate’s situation, you should ask yourself:
Would you want Kate’s inheritance protected in the event of a divorce?
Should her inheritance be held in a separate trust or protected through a spendthrift clause to ensure it remains hers, no matter what happens in her marriage?
How do you feel about your son-in-law having any claim to the assets?
These are critical questions to consider, especially when family dynamics and marriages can change over time.
Scenario 2: Anthony’s Struggle with Addiction
Now, consider your son Anthony. You love him deeply, but you know he’s been struggling with drug addiction for the past few years. He’s made some efforts toward recovery, but there have been several relapses, and his ability to handle money responsibly is a serious concern. You worry about what might happen if Anthony inherits a large sum from the trust—could it fuel his addiction?
Without safeguards in place, an outright distribution to Anthony could result in the money being misused or even put him in harm’s way. You fear that giving him unrestricted access to his inheritance might only worsen his situation and lead to a cycle of poor financial decisions, relapse, or worse.
You want to ensure Anthony is cared for financially but also protected from his struggles.
Reflection
In Anthony’s case, consider the following questions:
Should you set up a discretionary trust for Anthony, where the trustee controls distributions based on his needs and progress in recovery?
Would it make sense to place conditions on his inheritance, such as requiring him to maintain sobriety or seek regular treatment before receiving distributions?
Could appointing a trustee with experience in managing difficult or sensitive situations (such as a professional trustee) provide a better safeguard for Anthony’s wellbeing?
These considerations will help ensure that Anthony’s inheritance supports his recovery rather than exacerbating his struggles.