Structuring your estate plan requires you to take account of the assets that will be included in your estate, the various federal and state tax implications of transferring your assets, who will be responsible for administering your estate and the manner in which your estate will be divided among your intended beneficiaries. This article focuses on one of the questions you will need to answer before you execute your estate plan: Should you direct in your estate plan that a beneficiary’s inheritance be held in a trust or should it be transferred directly to the beneficiary, outright and free of trust?

A trust is an ownership arrangement whereby title to property is transferred to one person (the trustee) who manages the property and distributes it to another person (the beneficiary) in accordance with rules established by the transferor and by state law. Sometimes the answer to the question of whether or not to place assets in a trust is based solely on whether the beneficiary is financially responsible. If the transferor does not believe the beneficiary can be trusted to spend money in a prudent fashion, the transferor may choose to establish a trust for the beneficiary in order to prevent the beneficiary from squandering his or her inheritance. The terms of such would include a “spendthrift” provision which prevents the beneficiary from assigning his or her interest in the trust to his or her creditors. If, on the other hand, a beneficiary has demonstrated that he or she is capable of handling his or her own finances, the answer is often that the beneficiary’s inheritance should be given to him or her directly to spend as he or she wishes.

On its surface, this reasoning is understandable. The simplest way to transfer an inheritance is to allow it to pass directly to the beneficiary. Incorporating a trust arrangement into an estate plan may be viewed as adding complexity to the plan and may be interpreted as a lack of confidence in the beneficiary. However, as the use of trusts has evolved over time, spendthrift trusts have become more commonplace in estate planning. The stigma of being a beneficiary of a spendthrift trust has diminished. While a trust can add complexity to an estate plan, the practical benefits a trust arrangement offers beneficiaries should be the primary focus. When properly structured, a beneficiary may be better served by having his or her inheritance held in a trust because the trust can protect the inherited assets from being taken by the beneficiary’s creditors.

Consider, for example, an individual (Mary) with one daughter (Sharon) and an estate worth $1 million. Sharon is 40 years old, has operated her own business successfully for 15 years and has demonstrated that she is financially responsible. The simplest and most straightforward estate plan for Mary would be to direct that her estate pass to Sharon directly and to permit Sharon to handle her inheritance as she sees fit.

But suppose that after Mary’s death, Sharon is in a serious car accident; she hits another car and seriously injures herself and the other driver. The other driver obtains a large judgement against her which is not covered by her insurance. Due to her injuries, Sharon is no longer able to operate her business profitably. She incurs large debts trying to keep her business operational and her medical expenses are projected to be substantial. Her creditors seize all of her personal assets, including the $1 million she inherited from Mary. Sharon now is left with no means of paying her mounting medical expenses or her day-to-day living expenses.

If Mary had provided in her estate plan for Sharon’s inheritance to be held in a trust for her benefit, with a spendthrift provision, then the trust assets would have been protected from the judgments and would have been available to Sharon to cover her medical and living expenses.

Whether a trust arrangement should be incorporated into your estate plan should be considered in light of your particular circumstances. Whatever your particular circumstances may be, you should not lose sight of the fact that spendthrift trusts are not just for spendthrifts.