You may decide to keep assets in the trust and provide for a beneficiary, but not actually give the assets to him or her. Here are some situations with which you may be able to identify.
An Irresponsible Beneficiary: If you feel a beneficiary is too irresponsible to receive outright control of his/her inheritance (or has a problem with drugs, alcohol, gambling, etc.), you can specify that the inheritance remain “in trust” for his/her lifetime or until he/she reaches a more mature age.
The trustee will manage and invest the inheritance, and provide for the beneficiary’s basic needs as you instruct. If you don’t think your beneficiary is responsible enough to receive a regular income from the trust, the trustee can pay rent and other expenses directly so the beneficiary never actually has the money.
Give some thought to your choice as trustee. A family member acting alone may be too sympathetic and easily swayed—or just the opposite. You may want to have a corporate trustee (bank, trust company or independent professional) be a co-trustee to add some objectivity and share the responsibility. You’ll also need to specify who will receive any remaining inheritance if the beneficiary dies before receiving the full amount of the inheritance.
You may also want the trust to include a spendthrift clause to protect the trust assets from creditors. Generally, this says that the beneficiary cannot voluntarily spend any trust assets or income before they are paid to him/her. So if, for example, your irresponsible son or daughter buys an expensive sports car, the trust cannot be held responsible for payment.
Protection from Creditors/Spouse: As mentioned earlier, if you are concerned that a son- or daughter-in-law or a creditor could have access to the inheritance, you may want to keep the assets in trust and just provide periodic income to your beneficiary.
Incentive to Work: Maybe you want to give a beneficiary a little extra incentive to work and lead a productive life. For example, one father was concerned that his beach-loving son would continue to simply ride the waves while he waited around for Dad to die. The son saw no reason to seek regular employment because he knew he would receive a sizeable inheritance when Dad died. To encourage his son to be more productive, Dad arranged for the inheritance to stay in trust. And for every dollar the son earned on his own, the trust would match it.
Note: If you decide to income-match, make sure your trust will provide for your beneficiary if he/she is unable to work due to illness or injury. And don’t forget about retirement. Do you want your beneficiary to work for as long as he/she lives in order to receive an income from the trust?
Beneficiary Doesn’t Need the Money: You may have a child who is already financially secure and doesn’t really need the money. Instead of giving the inheritance to this child, you could keep the assets in trust for your grandchildren and future generations. You can still provide periodic income to your child and have the assets available as a safety net should circumstances change (due to illness or injury, divorce, death of a spouse, investment loss, job loss, etc.), and he/she needs some money.
Loved One with Special Needs: You may have a spouse, child, sibling, parent, or other loved one who is disabled or may simply not be able to handle an inheritance by him/herself after you die. This is a perfect time to keep the inheritance in trust and have the trustee provide for this person as you would. (This is another good time to consider a professional trustee.) See “Providing for a Loved One with Special Needs.”