Helping Clients Pass on Their Wealth
Is Outright Distribution the Right Choice?
An inheritance can be life-changing. Many younger Americans, stuck in a cycle of debt and rising costs, are anticipating their cut of the $84 trillion “Great Wealth Transfer”—a term financial experts use to describe the massive shift of wealth from older generations to younger ones that is expected to occur over the next two decades.[1] Most of these potential inheritors say that the inheritance they expect is more than just a cushion—they are counting on it to achieve their long-term financial goals.[2]
When handing down wealth, you have two main options: leaving it outright to their beneficiaries or placing it in a trust so it can be distributed to the beneficiaries over time. An outright distribution is by far the simpler option, but it comes with risks for the unprepared. For example, many inheritors-to-be may not be ready to handle a direct inheritance.
Great Wealth Transfer Hope versus Hype
According to a USA Today survey, about two-thirds of younger Americans expect to receive an average inheritance of around $320,000.[3] More than three-quarters say they plan to save or invest that money, and 40 percent say they will use it to pay off debt.[4]
There can also be an assumption that inheritors will use the money as your clients intend (i.e., responsibly), when experience, data, and the recipients themselves tell a different story.
A national study indicates that adults who receive an inheritance save only about half and either spend, donate, or lose the rest, and more than one-third of all inheritors saw a decline or no change in their wealth after getting an inheritance.[5]
Citizens Bank polled Americans about inheriting wealth and found that 72 percent say they are not prepared to manage an inheritance.[6] Parents may not be ready to leave an inheritance, either. Only about a quarter of adults feel prepared for and confident in the wealth transfer process, Edward Jones research finds.[7]
Six in 10 parents told Northwestern Mutual that their children do not value financial responsibility the same way they do, with more than half expressing concerns that this difference in values could negatively impact the family’s assets when they pass from one generation to the next.[8]
Pros and Cons of an Outright Inheritance
No matter how much a client plans on leaving to a beneficiary, knowing they are making a difference in a loved one’s life can be a source of pride and fulfillment. However, they may also feel pressure to make a lump-sum bequest, especially if their child or another beneficiary is struggling financially.
An outright distribution is quick, requires no oversight after it has been handed over, and usually has no fees associated with it. There are also no strings attached. The recipient can use the money any way they want.
However, an outright inheritance may not be in the beneficiaries’ best interests and could fail to solve their financial problems in the way the client might expect. For those beneficiaries who are unprepared to handle it, an inheritance could do the opposite by worsening financial problems or creating new ones.
Despite their best intentions to budget, invest, and responsibly spend an inheritance, beneficiaries could just as easily squander it on impulse purchases, risky investments, or financial scams. More than a quarter of respondents admitted to USA Today that they plan to use their inheritance for travel or luxury spending.[9] In addition, if an inheritance is distributed outright to a beneficiary who has outstanding debt, creditors could claim the money before the beneficiary can use it.
These downsides assume that the beneficiaries can legally accept their inheritance, which may not be true. If the recipient is a minor child, for example, or is incapacitated and does not have an agent under a financial power of attorney, a court-appointed conservator may be necessary.
Things to Consider When Using Beneficiary or Transfer-on-Death Designations
Advisors often focus on big-picture and long-term planning. However, the devil is in the details, and even seemingly straightforward aspects of a plan—such as beneficiary designations—can have profound implications for our clients’ financial objectives and legacy goals.
Beneficiary, transfer-on-death (TOD), and payable-on-death (POD) designations promise a smooth, probate-free handoff of assets that can save time and money. These tools take precedence over conflicting instructions in a will, but they are only as good as the care behind them. They need to be periodically reviewed to avoid being incomplete or out-of-date, which could potentially lead to unintended and detrimental consequences for the client and their loved ones.
Clients may be unaware of when they should consider changing their beneficiary designations and the steps they must take to make these changes. Client education can be extremely valuable in this area and strengthen the client-advisor relationship.
What Can Go Wrong with an Incomplete or Outdated Beneficiary Form
A report from the ERISA Advisory Council looked at best practices for retirement and life insurance planning and ensuring that plan participant intent is carried out. It found that beneficiary designations that do not accurately reflect a participant’s intentions can trigger disputes about who is entitled to the plan benefits following their death. Common disputes described in the report include:
- Participants do not update beneficiary designations prior to their death to reflect significant life events, such as marriage, divorce, death of a loved one, or birth of a child; such an oversight can initiate conflicts among the participant’s loved ones.
- Participants and designated beneficiaries die simultaneously, raising issues about how survivorship rules affect the distribution of benefits and how state law comes into play.
- Changes in service providers, administrators, or other factors could lead to lost or outdated beneficiary designations, resulting in plan benefits not being distributed to the intended beneficiary or requiring a probate administration.
- The plan does not allow the chosen beneficiary designation, creating doubt about who should receive the benefit (e.g., some plans may not allow minors, certain trusts, businesses, or charities to be named as beneficiaries).[13]
In addition to the unintended distribution of assets and disputes, an invalid, missing, or outdated beneficiary designation can result in the need for the accounts and property to go through probate, possibly causing payout delays and raising estate administration costs.
Assets that go through probate may also be subject to claims from creditors, reducing the final amount distributed to beneficiaries. Failure to properly identify or locate beneficiaries can cause further delays in the distribution process.
According to the ERISA report, a unique challenge of maintaining beneficiary designation forms is that they can remain on file for a very long time, sometimes for decades, without review, increasing the likelihood that the original designation is “stale.”[14] This long shelf life can also lead to the designation form being lost, especially when there are changes in plan administrators or service providers and the transfer process is not complete or thorough.
Which Trust Is Right?
Evidence suggests that many people are establishing trusts as part of an estate plan. Some motivations for creating a trust include avoiding probate, preserving privacy, planning for incapacity, protecting a beneficiary’s inheritance from creditors, minimizing estate taxes, and charitable giving.
Financial advisors are intimately familiar with a client’s financial situation and goals. You may have clients whose needs or goals align with the advantages of a trust. You may want to open a dialogue with these clients about implementing a trust. While you may not be able to offer detailed guidance, you can introduce them to various available trust types and how a trust might fit into their financial and estate plans.
Because of several converging trends—an aging population, rising asset values, a wave of wealth transfers, and pending tax law changes—clients may be interested now more than ever in a trust that can benefit them and create mutually beneficial arrangements between financial advisors and attorneys.
How to Spot Trust Opportunities
A client may not directly bring up the subject, but trusts have been a hot topic of late in the estate planning world, and there are signs that demand for them will continue to heat up in the coming years. The National Association of Tax Professionals’ director of tax content and government relations said that more baby boomers are utilizing trusts because of concerns about the next generation mismanaging their inheritance. In addition, such concerns are “causing them to create trusts to pass assets efficiently, but with some control being exercised from the grave.”[15]
A guest post at Kitces.com says that advisors can start the conversation about estate planning by first identifying whether a client has an estate plan.[16] Many clients likely do not; as of 2025, the number of Americans with a will is 24 percent and on the decline.[17]
Some of the leading reasons why Americans created an estate plan—or would consider making one—include the death of a loved one, family expansion, travel, the purchase of a home or significant asset, health concerns, retirement or other age-related milestones, and national or world events.[18]
Starting the Trust Conversation
With only around one-fourth of Americans having completed even a basic will,[19] the idea of a trust may seem like putting the cart before the horse. Whether a client should establish a will instead of or prior to a trust depends on their circumstances, but both options can and should be considered.
Reasons that clients may want to consider a trust include the following:
- Having a large estate (specifically a net worth exceeding the federal estate tax exemption or state-level exemptions for estate and inheritance taxes). If so, they could consider the following:
- A grantor retained annuity trust allows the client to transfer assets to beneficiaries while retaining an income stream.
- A charitable remainder trust provides an income stream to beneficiaries, with the remainder going to a designated charity.
- A dynasty trust passes wealth down through multiple generations.
- Desiring complex distribution instructions, commonly sparked by having blended families, beneficiaries with special needs, or beneficiaries who are prone to financial mismanagement or vulnerable to creditors. These scenarios could lend themselves to the following:
- A spendthrift trust protects assets from creditors and prevents beneficiaries from squandering their inheritance.
- A supplemental needs trust enables a disabled beneficiary to receive financial support from the trust without affecting their eligibility for means-tested government benefits.
- An incentive trust makes distributions to a beneficiary upon their meeting certain conditions, such as graduating, obtaining employment, getting sober, or volunteering for charitable organizations.
- A qualified terminable interest property trust provides for a surviving spouse while ensuring that the deceased spouse’s assets ultimately pass to their chosen beneficiaries when the surviving spouse dies.
- Being exposed to unique tax liabilities, such as having extensive real estate investments or owning a business. Possible trust solutions could include the following:
- A qualified personal residence trust allows for the transfer of the client’s primary residence or, in some circumstances, vacation home, to a trust while retaining the right to live in it for a set period.
- An irrevocable life insurance trust holds a life insurance policy that uses the death benefit proceeds to cover estate taxes or provide liquidity to the business after the client’s death.
This list barely scratches the surface of the diverse estate planning scenarios that trusts can address, from beneficiaries with specific or special needs to estates with complex assets or challenging family dynamics.
While trusts offer various benefits, not all are the same. Bear in mind that the same trust type can also be used for different planning purposes or to simultaneously achieve multiple planning goals. A revocable living trust, for example, not only avoids probate but can also be used for incapacity planning and estate tax mitigation.
In addition, trusts can hold various types of assets, allowing clients to get creative by, say, transferring business interests into a trust for stronger asset protection and succession planning purposes. Clients can also name a trust on a beneficiary designation or transfer-on-death designation form to hold and manage the assets for their beneficiaries after the clients pass away.
For a more comprehensive rundown on trust types, ways they can be utilized, and how they may fit into a client’s estate plan, schedule a time to talk.
[1] Julie Sherrier et al., Study: Gen Z and millennials plan to use inheritances to invest, pay off debt, USA Today (June 6, 2024), https://www.usatoday.com/money/blueprint/credit-cards/study-great-wealth-transfer-plans.
[2] As $90 Trillion “Great Wealth Transfer” Approaches, Just 1 in 4 American Expect to Leave an Inheritance, Northwestern Mutual (Aug. 6, 2024), https://news.northwesternmutual.com/2024-08-06-As-90-Trillion-Great-Wealth-Transfer-Approaches,-Just-1-in-4-Americans-Expect-to-Leave-an-Inheritance.
[3] Julie Sherrier et al., Study: Gen Z and millennials plan to use inheritances to invest, pay off debt, USA Today (June 6, 2024), https://www.usatoday.com/money/blueprint/credit-cards/study-great-wealth-transfer-plans.
[4] Id.
[5] Most Americans Save Only About Half Of Their Inheritances, Study Finds, Ohio State News, OSU.EDU (Mar. 4, 2012), https://news.osu.edu/most-americans-save-only-about-half-of-their-inheritances-study-finds---ohio-state-research-and-innovation-communications.
[6] Most Americans aren’t ready for the ‘Great Wealth Transfer,’ Citizens, https://www.citizensbank.com/learning/great-wealth-transfer-survey.aspx (last visited Mar. 21, 2025).
[7] The Great Wealth Transfer Starts with the Great Wealth Talk, Edward Jones Research Finds, Edward Jones (Feb. 27, 2024), https://www.edwardjones.com/us-en/why-edward-jones/news-media/press-releases/great-wealth-transfer-research.
[8] Northwestern Mutual, supra n. 2, https://news.northwesternmutual.com/2024-08-06-As-90-Trillion-Great-Wealth-Transfer-Approaches,-Just-1-in-4-Americans-Expect-to-Leave-an-Inheritance.
[9] Julie Sherrier et al., Study: Gen Z and millennials plan to use inheritances to invest, pay off debt, USA Today (June 6, 2024), https://www.usatoday.com/money/blueprint/credit-cards/study-great-wealth-transfer-plans.
[10] The Great Wealth Transfer Starts with the Great Wealth Talk, Edward Jones Research Finds, Edward Jones (Feb. 27, 2024), https://www.edwardjones.com/us-en/why-edward-jones/news-media/press-releases/great-wealth-transfer-research.
[11] Most Americans aren’t ready for the ‘Great Wealth Transfer,’ Citizens, https://www.citizensbank.com/learning/great-wealth-transfer-survey.aspx (last visited Mar. 21, 2025).
[12] Northwestern Mutual, supra n. 2, https://news.northwesternmutual.com/2024-08-06-As-90-Trillion-Great-Wealth-Transfer-Approaches,-Just-1-in-4-Americans-Expect-to-Leave-an-Inheritance.
[13] Advisory Council on Employee Welfare and Pension Benefit Plans (ERISA Advisory Council), Current Challenges and Best Practices Concerning Beneficiary Designations in Retirement and Life Insurance Plans, at 3 (Dec. 2012), https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2012-current-challenges-and-best-practices-concerning-beneficiary-designations-in-retirement-and-life-insurance-plans.pdf.
[14] Id. at 4.
[15] Ronda Lee, More Americans are dealing with tax filings for trusts as older boomers pass away, Yahoo! finance (Apr. 5, 2023), https://finance.yahoo.com/news/more-americans-are-dealing-with-tax-filings-for-trusts-as-older-boomers-pass-away-211151632.html.
[16] David Haughton, JD, CPWA, How Advisors Can Work With Attorneys To Drive Better Estate Planning Outcomes For Clients, Kitces (Apr. 29, 2024), https://www.kitces.com/blog/financial-advisor-estate-planning-attorney-planning-cooperation-roles-client-referrals.
[17] Victoria Lurie, 2025 Wills and Estate Planning Study, Caring (Feb. 18, 2025), https://www.caring.com/caregivers/estate-planning/wills-survey.
[18] Id.
[19] Id.