There are two basic ways to leave gifts to your heirs or beneficiaries: outright or in trust.

Outright Distribution

Over the course of history, outright distribution has probably been the most common type of transfer. Here, property (real or personal) passes to the beneficiary with no strings attached. It is the simplest kind of transfer. In legal language, where there is an outright distribution the beneficiary will own the asset in “fee simple.” This means that the beneficiary is free to do whatever they want with the asset; they can sell, give, or transfer it as they desire.

The downside of fee simple ownership is that the assets may also be subject to any creditors or predators of the beneficiary. Therefore, if the beneficiary is ever sued or has a judgment levied against them, their assets may be subject to seizure and ultimately lost. So, there is no protection for the beneficiary.

Often, a beneficiary may acquire an asset though a beneficiary designation form, a “Pay on Death” or “Transfer on Death” designation, or as a joint tenant. Often, these types of transfers are outright transfers and offer no protection for the beneficiary.

Trust Distribution

When assets are transferred in trust, the beneficiary is able to benefit from them, but there is a level of protection that is not found in an outright distribution. In my opinion, it is always better to leave things in trust versus a outright. And , contrary to popular belief, trusts are not only used by the rich and famous.

When something is left in trust, it is not technically owned by the beneficiary. Legal (technical) ownership is held by the trustee. The trustee is obligated by their fiduciary duty to manage the trust and its assets according to the instructions left by the trust maker (Grantor). If the Grantor did not leave any specific instructions, then the trust code will provide the instructions. So, if a beneficiary of a trust gets sued, they are unlikely to loose their inheritance. This is because they do not actually own the assets in the trust; the trustee “owns” the assets while the beneficiary simply “benefits” from the trust.

Some trusts are designed so the trustee is also the beneficiary. So, there may not be a need for a third party trustee. Even if the trustee is also the beneficiary, there is a still a level of protection for the beneficiary. This is because the trustee is bound by the terms of the trust and in many situations can only make distributions from the trust to the beneficiary according to the standards in the trust document.

If the trust is drafted correctly, the judgment creditor can not step in and seize the assets in the trust. You can also enhance the protection offered by a trust, by naming an independent, third party trustee, and allow them to make distributions for any purpose. Or, you can limit the distributions to “ascertainable standards” for an interested trustee.

Trusts can also be designed to last for a specific amount of time or they can last as long as state law will allow. Some states, such as Texas, still abide by the “Rule Against Perpetuities” while other states say a trust can last indefinitely.

It might be worth your time to look at your Will or Revocable Living Trust and see if you are leaving assets to your beneficiaries in trust or outright.