Importance of Giving Inheritance Through a Trust

Many advisors talk about the advantage of having a revocable trust to avoid probate, however, what is often over looked are the benefits of giving inheritance through a trust. Let’s take a simple example: Dr. Jones dies and leaves his daughter, 21-year-old Chelsea, an inheritance $1million in cash which she gratefully takes and deposits into her bank account.

According to American Psychological Association, 40-50 percent of the marriages in the United States end in divorce. Down the road, if Chelsea goes through a divorce then potentially half of that money would go to the spouse. If she ever goes through a bankruptcy, then those funds are accessible to creditors. If she lacks proper financial judgment, like many 21-year old’s do, there is a risk that she may end up making bad spending decisions.

On the other hand, let’s suppose Dr. Jones upon his death leaves the same $1million through a trust that becomes irrevocable upon death, set up for the benefit of Chelsea. Now, if she goes through a divorce, those funds are off limits as she doesn’t own the funds the trust does. If she ever goes through a bankruptcy or has any creditor issue, the assets in the trust are protected. In addition, during his lifetime, Dr. Jones could set up spendthrift provisions in the trust such as not have all the funds immediately accessible to Chelsea but instead on a staggered basis. Giving in trust has the advantage of divorce protection, bankruptcy protection, creditor protection and protects the beneficiary from themselves.

As cheesy as it may sound but it’s almost as if Dr. Jones is watching over Chelsea even after his death.