As we discussed in a prior blog, naming your minor children as beneficiaries of your assets can lead to some major problems, all of which are fixed by the living trust. Including a living trust in your estate plan, however, can be expensive. As a workaround, many people employ a strategy of naming a trusted adult (e.g., their sister, father, friend) as the beneficiary of their assets, and then having a tacit understanding with that adult that the adult is to spend the money inherited on the minor children. This strategy keeps the assets out of probate court and prevents the need for a court-appointed conservator to watch over the minor children’s money. While we understand that living trusts can be costly to prepare, this workaround strategy, unfortunately, has some serious risks, including:
- When the trusted adult inherits your assets by beneficiary designation, these assets legally become that adult’s assets. Nothing legally obligates him or her to spend the assets on your children.
- Even if the adult chooses to honor your tacit agreement, he or she does not have any real guidance on how and when to distribute money to your children. A trust agreement would have very specific terms and trigger points/dates upon which the trustee is directed to distribute money.
- Because the assets that the adult inherits by beneficiary designation legally become the adult’s assets upon your death, any distribution from the adult to your children is considered a gift and may be subject to the gift tax.
- Once the assets inherited by the adult are transferred to the adult’s name, these assets become subject to the adult’s creditors and could become part of a property settlement if the adult gets divorced. Also, if the adult passes away, these assets become a part of the adult’s estate and may pass to his/her heirs rather than your children.
If you have been thinking about employing this workaround strategy, or if you already have set up your beneficiary designations in this way, we recommend you schedule an appointment with one of the attorneys at La Grasso, Abdo & Silveri, PLLC to discuss your options and your unique situation. Our job as attorneys is to discuss all options and risks with clients and empower them to make the best choice for them.
