The simplest way to provide an inheritance for loved ones is to name them as beneficiaries in a will. Such arrangements are relatively straightforward and make it quite clear who should inherit what from the testator’s estate. However, the simplest solution is not always the best solution. A direct inheritance may be expedient and convenient, but it can also be somewhat dangerous for the beneficiary. There are a handful of scenarios in which a direct inheritance could theoretically do more harm than good.
People concerned about what might happen after their passing may want to consider establishing a trust instead of simply drafting a will. What circumstances could make a direct inheritance problematic?
Dependence on certain benefits
People with special needs and those living with limited resources often rely on certain government benefits to afford independent living. A lump-sum inheritance could cut people off from the benefits that they rely on, thereby undermining the positive impact that an inheritance generates.
Addiction-related struggles
People may become addicted to substances, including drugs and alcohol. They can also develop unhealthy habits related to gambling. When families are aware of someone’s substance abuse struggles or questionable habits, there may be reason to worry about providing a direct inheritance. People might abuse and waste inherited resources.
The possibility of litigation
Perhaps an individual works in a high-risk profession where they might eventually face a malpractice suit. Perhaps they run a small business and could face a lawsuit brought by an employee or a dissatisfied customer. Maybe they are in an unhealthy marriage, and divorce is likely. An inheritance could be at risk in scenarios where people face legal issues. A trust helps prevent claims against an inheritance or allegations of commingling in the event of a beneficiary divorce.
In some cases, there may be reason to worry about the financial abuse of a beneficiary. Other times, certain parties cannot directly control an inheritance. Minors, pets and people with special needs may lose much of what they inherit due to the misconduct of their parents or guardians.
Funding and properly structuring a trust allows a concerned individual to leave resources for specific beneficiaries while minimizing the risk related to a lump-sum inheritance. People creating or revising their estate plans may need to look at the needs of their beneficiaries when choosing what types of legal instruments to use.