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When shouldn't one make an outright gift to a loved one?

Many accounts allow the transfer of some property or inheritances to family members and others in Minnesota without undergoing probate, such as jointly-owned accounts and real estate, retirement accounts and life insurance policies and transfer on death or in trust for accounts. These are usually transferred outright to beneficiaries upon the presentation of a death certificate. A living trust may also be created that becomes effective immediately upon execution

However, a testamentary trust through a will should be considered, because property should not always be transferred outright to certain individuals. This may also have advantages when a person does not have the time or funds to create a living trust.

Money should not be directly transferred to minors. They cannot receive property without an adult being named by a court as a financial guardian or conservator. Funds that may have been saved on probate expenses may have to be spent on other legal fees.

Additionally, individuals with disabilities who are receiving Medicaid or other public assistance may be disqualified from this assistance if they acquire too much money in their names. Funds transferred to individuals having creditor problems are sometimes unprotected when they receive money directly.

Persons who suffer from drug or alcohol abuse should not receive funds directly which may do directly to their addictions. Finally, spouses who are nearing divorce can make reckless decisions with testamentary substitutes they receive directly.

Creating a testamentary trust for these individuals is a way to address transfers to these individuals. It goes into effect once the will undergoes probate.

This may provide the executor with the ability to create a supplemental needs trust that protects beneficiaries who become disabled and continue to receive benefits while having indirect access to funds. Executors can also create a Uniform Gift to Minors Account for a minor beneficiary who is receiving an amount that is not large enough to create a testamentary trust.

This also allows a specific percentage of the total funds to be received by the testator's choice of beneficiary while taking advantage of certain tax benefits. It also makes it easier to determine contingent beneficiaries by naming them in a will instead of having to submit forms changing beneficiaries on accounts.

Correctly drafting these trusts and identifying beneficiaries is extremely important. An attorney can assist with drafting these documents, complying with Minnesota law and presenting other estate options.

Source: Kiplinger Personal Finance, "5 types of people you should gift to using your will," Daniel A. Timins, Esq., CFP, March 30, 2017

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