Basic Strategies for Transferring Assets to Your Loved Ones
A friend today posed a question to me at the behest of her mother about simple (her words not mine) ways to leave her assets to her heirs. This sparked a light bulb moment resulting in today's article, but rather than calling them simple, I prefer the term "basic", as they may not necessarily be simply "simple".
Suffice it to say that not every family is the same. Depending on various factors, such as family relationship issues, ages and/or health of heirs, creditor issues, not to mention personal values and goals, some of these strategies may be for you while others will not be.
Also, I call these "basic" strategies for a reason. There are more complex strategies available that also could benefit you and your family, particularly for more affluent families.
#1 – No Strings Attached
The most basic and least complicated strategy is to give or leave assets to heirs outright with no strings attached. This could be accomplished by means of gifts made during the lifetime of the giver and/or transferring the assets at death via a probated will or via a living revocable trust.
For some families with uncomplicated family issues and mature responsible heirs, this could work just fine. However, this is not without risk. Since there are no binding strings, heirs could blow at will through their inheritance leaving them destitute. They could also fall victim to creditor claims, unscrupulous scammers or, if married currently, lose their inheritance in a divorce proceeding.
#2 – Use a Lifetime Trust
To manage the downside risks discussed above, some will want to leave their assets to a lifetime trust for the benefit of their heirs. In this approach, the assets stay in trust for the beneficiary's lifetime, is invested for their benefit, and the heirs are periodically distributed part or all of the income made by the trust. How much is distributed is generally governed by the terms of the trust, so there is great flexibility for the grantor of the trust to "rule from the grave" so to speak.
Use of a trust in this fashion gives the highest degree of asset protection available. The beneficiary generally can't spend his or way through the wealth left them, and they are protected from lawsuits, creditors, divorces, or unscrupulous actors seeking to take advantage of them. Further, the trust grantor can use this strategy to provide for future generations beyond their immediate progeny as well as charitable causes.
#3 – Transfer Assets in Bits and Pieces
Sometimes, rather than transferring your wealth to your heirs all at once, it makes sense to do so over time in bits and pieces so to speak. This can facilitate the teaching of greater financial literacy to your loved ones, as well as minimize risk by not having all their inheritance exposed at once.
This strategy can begin during your lifetime by making lifetime gifts to your heirs. I know some parents and grandparents who do this yearly, use the gifts to teach their progeny basic financial concepts, and tie future gifts to the practice of healthy financial habits.
Another idea is to leave assets in trust at death and, while distributing trust income annually for use and enjoyment, stipulate through the terms of the trust that a percentage of the trust principal be distributed as the beneficiary reaches certain ages. For example, the trust may state that 1/3 be distributed at age 30, 1/3 at age 40 and the final 1/3 at age 50.
You can also tie principal distributions to certain events occurring, such as getting a college or technical school degree, keeping their nose clean legally, etc.
#4 – Mixing Them Up
Most families will find that a combination of the above is best suited for their situations and specific beneficiaries. One heir may be fully ready to receive their share in its entirety with no strings attached, while another, due to lifestyle, or financial and/or relationship problems, may be best cared for by having theirs in trust for their full lifetimes. Others may fall somewhere in between those two extremes.
The point is, this is your legacy, and it is one that can have major impact on your family for generations to come. A thoughtful and careful approach will serve you and your family well and could be the best gift you ever give them, even in death, other than your personal focused time and attention right now.
