Testamentary Trust Planning: When Beneficiary Designations Alone Are Insufficient

In many cases, beneficiary designations can be used as a simple method for avoiding probate without the necessity of a trust. However, there are a number of circumstances where relying on beneficiary designations alone may not be the best way to accomplish estate planning goals. Such circumstances call for a Testamentary Trust, created under the decedent’s Last Will and Testament or a Living Trust, to dispose of assets upon death while avoiding the risks often associated with outright distributions.

1) Special Needs Beneficiaries: Allowing assets to pass directly by beneficiary designation to a beneficiary with a disability could result in a loss of vital Medicaid or SSI benefits. A smart alternative for someone who wants to provide for a special needs beneficiary is to name a Testamentary Special Needs Trust, created under the donor’s Last Will and Testament or Living Trust, as the beneficiary on the account. This Trust can hold assets for the beneficiary’s benefit without jeopardizing Medicaid or SSI benefits. Another benefit of this trust is that any assets remaining at the beneficiary’s death will pass to the donor’s nominated successor beneficiaries rather than the state.

2) Minor Children: Allowing assets to pass directly to minor children leaves inherited assets vulnerable to a number of contingencies that cannot be accurately predicted ahead of time. Such a transfer would allow a beneficiary as young as 18 to access his or her entire inheritance, creating a temptation to squander funds that took a lifetime to build. Even a frugal beneficiary’s inheritance may be exposed to third-party creditors created by divorce, bankruptcy, or lawsuits. These contingencies can be addressed by leaving a young beneficiary’s assets in a Testamentary Trust that will be sheltered from creditors; furthermore, restrictive provisions may be tailored to the beneficiary’s needs, allowing a Trustee to manage funds until the beneficiary is mature enough to take over management at a suitable age.

3) Troubled Beneficiaries: There are some beneficiaries who, regardless of age, will never be able to manage money for any number of reasons. In these circumstances, a Testamentary Trust may be established with restrictive provisions to enable a Trustee to provide for a beneficiary without allowing him or her to access Trust property. For example, the Trustee may be authorized to make distributions for “health, education, maintenance, or support,” however, the Trustee is under no obligation to do so and the beneficiary has no right to withdraw Trust property without the Trustee’s permission. Alternatively, the donor may choose to allow the beneficiary unfettered access to all of the trust income while preventing the beneficiary from accessing principal. Finally, “incentive trust” provisions may be included to condition the receipt of trust funds on completing school, vocational training, or simply staying out of trouble.