People enjoying their retirement years frequently make choices based on not just their own comfort but also on a desire to leave a legacy for their loved ones. Providing children, spouses and even grandchildren with practical support is a common goal for aging adults. They want to have a long-term positive impact on the people who matter most to them.
Unfortunately, many testators establishing estate plans fail to adequately consider how a large inheritance could potentially have a negative impact on their beneficiaries. There are several reasons that a sizable inheritance could theoretically do more harm than good for the people on that gift’s receiving end.
Inheritances can affect state benefits
Many people rely on benefits later in life or due to personal vulnerability. For example, an adult child with special needs may receive housing benefits as well as special medical coverage because they cannot develop a career like their peers. A lump-sum inheritance can leave someone ineligible for certain forms of financial aid for years.
Inheritances can lead to bad choices
Anyone who suddenly receives a sizable windfall might make the mistake of squandering their inheritance. Someone who has a history of substance abuse or compulsive shopping could burn through tens of thousands of dollars very quickly. In some cases, an inheritance that a beneficiary tries to share with their spouse could be vulnerable if they divorce in the future. Giving a non-beneficiary spouse access to or control over inherited property can lead to claims against those assets in a future divorce. Once a beneficiary receives their inheritance, they can effectively do what they want with it even if their choices prove to be detrimental.
Direct inheritances can cause fights
Family members sometimes end up feuding over the distribution of inherited property when someone dies. Siblings may fight so intensely that their relationships never recover. Stepparents and stepchildren can become estranged from each other. What a testator tried to do for the benefit of their loved ones can backfire if they don’t plan carefully.
A trust can help manage an inheritance
Creating a trust is a means of ensuring an inheritance has a positive impact. A trust is harder to challenge and therefore is less likely to lead to litigation between family members. Trusts can also limit how people use inherited property so that they don’t squander their resources. Trusts can prevent commingling that leaves resources vulnerable during divorce and can even help protect someone’s eligibility for benefits.
Creating a comprehensive estate plan that takes into consideration someone’s family circumstances can be beneficial for a testator and their beneficiaries. The addition of a trust to a standard estate plan can be a smart move in a variety of different scenarios.