In planning their estates, people have a wide variety of reasons for selecting particular beneficiaries and determining the amounts they want those beneficiaries to receive and the manner in which they want the beneficiaries to receive their inheritances. This newsletter explores gifting issues.
BENEFICIARIES vs. HEIRS AT LAW
Under California law, beneficiaries and heirs at law are required to receive written notice of a person’s death. They are also entitled to receive a copy of the deceased person’s Trust or Will upon request. The term “beneficiaries” and the term “heirs at law” are not synonymous or even subsets of each other. Not all beneficiaries are heirs at law; not all heirs at law are beneficiaries.
A beneficiary is someone who is specifically identified in a Trust or Will as the recipient of money or property from a deceased person’s estate. An heir at law is someone, related by blood to the deceased person, and who otherwise would receive all or a portion of the deceased person’s estate if the decedent did not create a valid Trust or Will prior to death. Heirs at law are also known as the natural objects of a person’s bounty. The California Probate Code provides a list of the heirs at law for a deceased person’s estate and determines how much that heir at law would receive if the decedent made no other plan.
SHOULD THE GIFT BE RESTRICTED?
Most of my clients who have children want to leave their estate to them. Few, however, decide to leave the estate as an outright gift to the children. The terms and conditions set on how and when the children receive their inheritance often depend on the dynamics of the family relationships. Statistically, someone who receives a lump sum of money spends the entire amount within eighteen months of its receipt. For many, parents prefer to give the inheritance to their children in a way that assists the child in resisting the urge to spend the gift as soon as it is received. The way to do this is to instruct the Trustee to hold the child’s share in trust for the child’s benefit. Consider the following:
• Restrictions may be imposed on a child’s share of the estate in an effort to control the child’s future behavior.
• Conditions may be set so that the child must achieve specified accomplishments, such as college graduation, or attaining a particular age, before receiving a specific percentage of the inheritance.
• Staggering the inheritance over a period of years allows the child multiple opportunities to manage their new found wealth and minimizes the chance that the money will be dissipated in a short amount of time.
• While the parents’ estate is held in trust for the benefit of the child, provisions can be set which preclude potential creditors of the child (including potential ex-spouses) from reaching the trust assets before they are actually paid out to the child. This kind of asset protection, while not available for the grantors of a living trust, is possible for the children of the grantors.
• Restrictions can also be placed for a child’s inheritance when the parents are concerned that the child has a substance abuse problem, mental illness, or other limitations that prevent the child from properly managing the money.
Sometimes, parents have children with particular mental or physical impairment which prevent the child from being able to care for himself or herself. It is critically important for parents of these children to be sure that their estate plan properly addresses those specific needs.
A particular kind of trust, called a Special Needs Trust, can be created to hold the child’s inheritance in such a way that the asset will be available to assist the child but not in such a way that would render the child ineligible for governmental benefits such as Supplemental Security Income (SSI). This is because SSI is a needs-based programs and the beneficiary would be required to spend down resources and income before being able to qualify for benefits from the state or federal government.
Governmental benefits usually include providing for a child’s food and shelter. The Trustee of a Special Needs Trust, created by the child’s parents, can provide certain things for the child which will enhance their life without causing the public benefits to be diminished.
The Trustee of the Special Needs Trust must provide the beneficiary with items that either become exempt items in the month following the month in which the item is given to the beneficiary, or items that are used in the month they are give; otherwise the benefits are reduced. Examples of items which become exempt assets are household goods, books, computers and other personal electronics. Examples of items that are used in the month in which they are given are vacations or tanks of gas. It is important to speak with an estate planning attorney who is familiar with the rules surrounding Special Needs Trusts to ensure that if they are necessary, they are properly created.
Sometimes, my clients want to be sure that their estate passes, in whole or in part, to one or more entities which qualify as charitable organizations under the Internal Revenue Code. Doing so results in an income tax deduction for the client’s estate and therefore is often used by large estates as a means of reducing the potential estate tax liability as well as encouraging the growth of organizations performing ongoing good works.
Charitable giving is also done when the parent’s desire to demonstrate the value they place on supporting particular causes, the importance of “giving back” to society, and to prevent their children from relying exclusively upon the expected inheritance for their means of support.
OTHER MOTIVATIONS FOR GIFTING
Perceived need is a reason that goes in both directions: it may be the cause for a person getting a gift (because he needs it) or as a reason for not getting a gift (because he married into a wealthy family). Also a sense of fairness may motivate parents either to give to their children equally, or to equalize gifts at death due to unequal lifetime gifts to children.