Breaking Down the “Trust Fund Baby” Stereotype

This is an article from the Hunter Law Office (https://blog.hunterlawoffice.net/) in Rockville, Indiana, that we thought others may find helpful.

People create Trusts for a multitude of reasons. In my world, contrary to the stereotypical “Trust Fund Baby” phrase, most of them are not the super affluent. In fact, they are just like you and me.

Regardless of whether an individual creates a Will or Trust, he/she has the ability to leave an inheritance to an individual either “outright” or “in trust”. First, an outright distribution is the standard “here is your inheritance check” – that is, it is a no-strings-attached inheritance. Second, a distribution “in trust” is when a Trust is created to house an individual’s inheritance. You may be thinking: “Well, why would I, plain ol’ me, need to leave a beneficiary their inheritance in a Trust?” –or— “I don’t want my kid [or beneficiary] to be a Trust Fund Kid!” However, often the reason for leaving an inheritance via a Trust is to protect your beneficiary from himself/herself and from any issues they are currently experiencing … like any of the following:

1. Creditors/Bankruptcy. Do you know of someone who has a phone that rings off the hook from bill collectors? If so, it is wise to leave an inheritance to such an individual via a Trust because this will protect their inheritance from either 1) going immediately to the hands of the creditors or 2) getting swallowed up in a bankruptcy proceeding.
2. Marital Issues/Divorce. What about an individual who is experiencing marital issues with the possibility of a divorce on the horizon? Again, it is wise to leave an inheritance to such an individual via a Trust because this will protect their inheritance so that 1) their spouse can’t get their hands in the money and 2) it does not get wrapped up in a divorce proceeding.
3. Medicaid. Medicaid has specific rules as to “how much” an individual is allowed to have in his/her name – and they have specific rules as to waiving an inheritance. It is best to leave an individual who is receiving a benefit like Medicaid, an inheritance via a Trust. The Trust will, again, allow them to receive an inheritance (without kicking them off) and protect it from Medicaid.
4. Addiction. It does not come as a surprise to me that it is not enjoyable to relay the message to your estate planning attorney that there is a beneficiary who struggles with an addiction – any kind of addiction. However, it is important to share this information so that we can properly plan for him/her. A possible solution is to leave an inheritance to them via a Trust, so that the addiction does not get amplified by receiving an outright distribution.
5. Age. I don’t know about you, but if I received an inheritance at the ripe age of 18 or 21 (okay, or really any age in my early 20s!), I would likely have spent it as fast I could say the word “mall.” While it sounds silly, you have the option to limit how much and how often a beneficiary receives their inheritance. Consider the possibility that their inheritance is divvied up over the course of their working life – that is, a little at the age of 18, a little at the age of 25, … etc. This can be accomplished via a Trust.

As you can see, just because an individual inherits funds in a Trust does not mean he/she is the infamous “Trust Fund Baby.” In fact, the reasons above are not the only reasons I have seen individuals have Trusts created for their beneficiaries. The point is – every single family is different and sometimes a family’s situation calls for a beneficiary to receive their inheritance in a Trust. It is important to me to extract the “I don’t want my kid [or beneficiary] to be a Trust Fund Kid!” mindset because the most important thing about your estate plan is that your beneficiaries are protected from themselves and others.