Is Outright Distribution the Perfect Fit for Your Loved Ones?
Although Americans are living longer and spending more time—and money—in retirement, many parents intend to leave an inheritance to their children. The exact amount can vary greatly depending on individual circumstances and wealth levels, but even a small inheritance can be meaningful and help set a child up for long-term financial success, provided they are ready to handle it, which may not be the case.
Most families fail to discuss wealth transfers to ensure that younger generations are prepared for an inheritance. Parents need to decide how they want to pass their assets (accounts and property) to their children and other beneficiaries so they can plan the transfer in a way that fits their goals and their loved ones’ abilities to manage their inheritance. The wealth transfer process includes deciding whether to leave a loved one an outright inheritance or to pass their wealth down in a more controlled manner.
Pros and Cons of an Outright Inheritance
Over the next 20 years, an estimated $84 trillion in assets is expected to change hands from older Americans to younger Americans in what financial experts are calling the “Great Wealth Transfer.”1 According to a USA Today survey, about 76 percent of Americans receiving an inheritance say they plan to save or invest it, 40 percent say they will use it to pay off debt, and 21 percent want to leave the money to their children.2 Another survey found that, among those expecting to receive an inheritance, 50 percent consider it “highly critical” or “critical” to their long-term financial security and retirement.3
The most straightforward way to transfer wealth is by outright distribution. An outright distribution is fast and simple, and there are typically no fees associated with it. There are also no strings attached. When a beneficiary receives an outright distribution, they are free to use, sell, or manage the money and property however they want, with no conditions, restrictions, or oversight. However, an outright inheritance may not be in the beneficiaries’ best interest. For someone unprepared to handle an inheritance, not only could the money fail to solve their financial problems, but it could also worsen them or lead to new ones. In spite of their best intentions to budget, invest, and responsibly spend an inheritance, your loved ones 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.4 Many (72 percent), according to a Citizens Bank survey, also admit that they are unprepared to manage an inheritance.5 One downside of an outright distribution is that if a beneficiary has debt, something many young people struggle with, a creditor might be able to make a claim against the beneficiary and take their inheritance even before they can benefit from it. Certain beneficiaries may not be legally able to receive an outright distribution. If the recipient is a minor child, for example, or is incapacitated (unable to manage their affairs) and does not have an agent under a financial power of attorney, a court-appointed conservator may be necessary to receive and manage their inheritance for them.
Alternatives to Outright Distribution
None of this is to say that outright distributions are inherently bad. Deciding whether to leave an outright inheritance to a beneficiary depends heavily on their personal situation. Even within the same family, children can have wildly different financial aptitudes and attitudes. Some are perfectly capable of managing their inheritance. Others struggle to plan and save for the future. There can also be a gap between what children plan to do and what they end up doing. Parents may sometimes need to protect their children from their own bad habits. No matter how much you plan to leave to a beneficiary, it can be a source of pride and fulfillment to know you are making a difference in their life. A Northwestern Mutual survey found that, among those expecting to leave an inheritance, more than two-thirds (68 percent) said it is their “single most important financial goal” or is “very important.”6
However, leaving an inheritance can also be a source of trepidation. 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.7 And only about a quarter of adults feel prepared for, and confident in, the wealth transfer process, Edward Jones research found.8 When deciding what method of distribution is best for your child, it helps to know their current financial situation and their short- and long-term financial goals, such as paying down debt, buying a home, giving to charity, and saving for education. This knowledge starts with a family discussion about wealth transfers. We would love to be part of the conversation and answer any questions you and your family have about inheritance-related matters, such as taxes, ways to invest and budget an inheritance, and estate planning after an inheritance.
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 Id.
3 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-GreatWealth-Transfer-Approaches,-Just-1-in-4-Americans-Expect-to-Leave-an-Inheritance. 4 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. 5 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).
6 Northwestern Mutual, supra n. 3, https://news.northwesternmutual.com/2024-08-06-As-90-Trillion-GreatWealth-Transfer-Approaches,-Just-1-in-4-Americans-Expect-to-Leave-an-Inheritance. 7 Id. 8 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-wealthtransfer-research.+
Beneficiary and Transfer-on-Death Designations: Are You Doing It Right?
Do you know which of your accounts have beneficiary designations, sometimes called transfer on-death (TOD) or payable-on-death (POD) designations? Have you updated them recently? Are you aware of what can go wrong if there are issues with your beneficiary designation forms? If you answered “no” to any of these questions, it may be time to review your beneficiary, TOD, and POD designations and confirm that everything is accurate, complete, and current. Accounts and property with beneficiary, TOD, or POD designations take precedence over your will or living trust, so keeping forms updated is crucial to ensuring that your accounts and property go quickly and seamlessly to the right people.
Where to Find TOD, POD, and Beneficiary Designations
Beneficiary, TOD, and POD designations are made using legal forms that specify who will receive the asset (e.g., accounts, property, death benefits, etc.) after the original owner dies. Such designations allow you to pass assets directly to your beneficiaries and avoid probate. Avoiding probate can reduce estate costs, ultimately leaving more money to benefit your family and loved ones, and result in faster distribution to beneficiaries. Common asset types where beneficiary designations come into play include the following:
- retirement accounts—401(k)s, individual retirement accounts, and other retirement
plans; - investment accounts—Brokerage accounts, stocks, bonds, and mutual funds;
- bank accounts—Checking accounts, savings accounts, and certificates of deposit;
- life insurance policies—All types of life insurance policies, including whole, term, and
group; and - real estate—TOD deeds and similar alternatives (offered in more than half of states).
For most Americans, their home and financial accounts are the primary source of their wealth, making them central in an estate plan1 and making it all the more important that beneficiary designations for these assets reflect your current wishes.
What Can Go Wrong with an Incomplete, Inaccurate, or Outdated Beneficiary Form?
According to financial advisors, beneficiary form errors are among the most common—and the costliest—estate planning mistakes that people make.2 These errors fall into a few main buckets:
- Failure to name a beneficiary. Many people simply forget to complete beneficiary designation forms or put them off indefinitely. This situation is especially common for inherited accounts.
- Outdated information. Major life events such as marriage, divorce, the birth of a child, or the death of a beneficiary necessitate updating designations.
- Inaccurate or missing information. Mistakes in spelling, addresses, or other identifying information or failure to provide complete information can cause delays, confusion, or even disputes when processing beneficiary designations.
- Naming a minor as beneficiary. Technically, minors can be named as beneficiaries, but they cannot legally receive or manage money and property above a certain value. If they are named as beneficiaries, a court may need to appoint a guardian to oversee the funds for them until they reach the age of majority (18 years of age in some states and 21 in others).
- Overlooking complex circumstances. A beneficiary may be unable to manage their inheritance because of a disability, special needs, poor money habits, mental health issues, or substance use disorder.
- Not naming contingent beneficiaries. If the primary beneficiary dies before the account holder or cannot be located and no contingent (backup) beneficiary has been named, it will be treated as if no beneficiary had been named.
- Lost or invalid forms. Unfortunately, financial institutions sometimes misplace beneficiary designation forms or fail to process them correctly. Also, if a financial institution or employer changes the plan’s service provider or administrator, the original beneficiary designation may no longer apply, meaning that a new beneficiary designation form needs to be completed under the new provider.
In addition to the unintended distribution of accounts, property, or death benefits and related disputes, an invalid, missing, or outdated beneficiary designation can result in the assets requiring probate administration, possibly causing payout delays and raising estate administration costs. Also, most things that go through probate may be subject to claims from creditors, potentially reducing the amount distributed to beneficiaries.
To emphasize how disastrous beneficiary form errors can be to an estate plan, here are some examples of how they could play out in the real world:
- Divorce dilemma. John and Mary were married for 20 years. John had a 401(k) from his employer, with Mary listed as the sole beneficiary. They divorced, and John remarried. John passed away unexpectedly, and despite his wishes for his current wife to inherit his retirement funds, the plan administrator, bound by the beneficiary designation, paid the entire sum to his ex-wife. Not all states have revocation-upon divorce laws, and even in states that do, there are often exceptions and specific situations where the rules do not apply.
- Forgotten children. Sarah had a life insurance policy from her early 20s naming her parents as beneficiaries. She later had two children but never updated the policy. Upon Sarah’s death, the life insurance proceeds went to her parents.
- Probate purgatory. Robert had a brokerage account but never designated a beneficiary. When he died, the account became part of his probate estate, resulting in a lengthy and expensive legal process that delayed the distribution of his money and property to his heirs. Because the assets were tied up in probate, creditors also had easier access to those funds.
- Incapacitated beneficiary. A woman named her adult son as her sole beneficiary on her life insurance policy. Years later, her son was in a severe car accident and became mentally incapacitated. When the woman passed, there was no clear plan for how the life insurance funds should be managed for her incapacitated son, and if he was receiving needs-based benefits, those benefits could be jeopardized by his receiving the funds.
Schedule an Estate Plan Review
A recent survey found that nearly one-fourth of Americans have not revised their estate plan since creating it. Many have also not updated it within the past 10 to 15 years.3 The recommended timeline for reviewing beneficiary designations is the same as for the rest of your estate plan—at least every few years or after any significant life event. During the review process, you and your attorney can dig into details such as the following:
- Are these beneficiaries still the people you want to receive your accounts?
- Are the beneficiaries still living?
- Are they capable of managing the inheritance?
- Is there more than one beneficiary named, and if so, how hard is it to divide the account or property, and what is the potential for conflict between/among the beneficiaries?
- Have you informed the beneficiaries that they are named? Do they know how to claim their inheritance?
- Are you fine with them receiving an outright distribution, or are safeguards needed?
When reviewing beneficiary designations, get current confirmation directly from the financial institutions to verify whom they have on record. Do not just rely on the forms you originally filled out to ensure your designations were properly processed. Even if everything looks good after a review, for added protection and control over the inheritance in complex circumstances, you may want to name a trust as the beneficiary and allow a trustee to manage the inheritance on your loved ones’ behalf. You can also name a charity as a beneficiary. Avoid letting a simple clerical error derail your estate plan. Schedule an attorney review to double-check that every “i” is dotted, every “t” is crossed, and every form accurately expresses your intentions.
Rakesh Kochhar and Mohamad Moslimani, 4. The assets households own and the debts they carry, Pew Rsch. Ctr.
(Dec. 4, 2023), https://www.pewresearch.org/2023/12/04/the-assets-households-own-and-the-debts-they-carry. 2 Mark Henricks, Out-of-date beneficiary designations are a common and costly mistake, CNBC (Apr. 17, 2018),
https://www.cnbc.com/2018/04/16/out-of-date-beneficiary-designations-are-a-common-and-costly-mistake.html.3 Victoria Lurie, 2025 Wills and Estate Planning Study, Caring (Feb. 18, 2025), https://www.caring.com/caregivers/estate-planning/wills-survey.
Choosing the Ideal Trust for Your Wishes
The term estate may bring to mind mansions, vast fortunes, and a level of wealth that many people do not possess. This misconception may lead to the false impression that estate planning is only for the rich and famous, discouraging those with more modest means from seeking professional guidance. If estate is a loaded term, then trust is even more so. Mention the word trust, and many people think of wealthy families, complex legal arrangements, and a level of sophistication that can seem intimidating or unnecessary.
Misconceptions about trusts often stem from a lack of understanding about what a trust actually is, how it works, and situations where it can provide benefits above and beyond a will. Wills and trusts are complementary—not mutually exclusive. They can serve different roles in an estate plan and often address different concerns.
Trust Basics
Trusts can work in various ways depending on the type of trust and how you want to pass down your assets (accounts and property). However, every trust has some things in common. When you transfer assets to a trust, the trust becomes the legal owner of those assets. You are, in effect, giving up direct ownership of whatever assets you place in a trust, which can include real estate, bank and financial accounts, personal property, and even things such as life insurance proceeds and business interests.
- As the trust maker (sometimes called the trustor, settlor, or grantor), you create the trust and decide which asset(s) to put into it.
- A trustee (or co-trustees) manages the trust on your beneficiaries’ behalf. Depending on the type of trust you create, you might be the initial trustee.
- Your beneficiaries receive proceeds from the trust based on instructions you leave the trustee in the trust agreement. You can give the trustee wide discretion to manage assets or prescribe very narrow parameters. Depending on the type of trust, you might also be the beneficiary while you are alive.
Although a will can also be used to name beneficiaries to receive your assets, it takes effect only after you die. A trust, on the other hand, is effective during your lifetime, which means that a successor (backup) trustee can step in to manage your assets if you become disabled or injured—not just when you pass away, as with a will.
People create trusts for numerous reasons. Some of the most common are the following:
- Avoiding probate. The court process known as probate imposes additional costs, delays distributions, and is part of the public record. Assets held in a trust avoid probate. They pass directly—and, in most situations, privately—to beneficiaries according to the instructions you have included in the trust agreement.
- Reducing estate taxes. If your net worth exceeds exemption amounts for estate and inheritance taxes, certain types of trusts can help minimize your tax liability, leaving more money to benefit your loved ones.
- Protecting assets. Trusts can shield assets from the beneficiary’s creditors, lawsuits, and potential financial mismanagement.
- Providing for loved ones. Trusts can ensure that loved ones, such as minor children or those with special needs, are cared for according to your wishes.
- Managing assets during incapacity. A trust allows for the seamless management of assets if you become incapacitated (unable to manage your affairs), ensuring estate plan continuity and avoiding potential court intervention.
- Charitable giving. Trusts can be used to support charitable causes and provide associated tax benefits.
- Incentivizing behavior. You could structure a trust to encourage beneficiaries to achieve certain goals, such as pursuing education or maintaining employment.
Demand for trusts is increasing as Americans go through the “Great Wealth Transfer” from older generations to younger family members.1 Ultimately, the decision to create a trust reflects a desire for greater control, protection, and flexibility in managing and passing down wealth.
Trust-Based Planning Scenarios
Understanding how trusts work can help you properly visualize how a trust might fit into your own estate plan. To further illustrate the variety of roles trusts can play in achieving your legacy goals, here are some specific examples of scenarios where trusts are commonly utilized:
- You have a high net worth (specifically, a net worth exceeding the federal estate tax exemption, or state exemption levels, which are as low as $1 million in Oregon and even lower in some states that impose an inheritance tax). If these taxes affect you, consider
o a grantor retained annuity trust—allows you to transfer assets to beneficiaries while retaining an income stream;
o a charitable remainder trust—provides an income stream to beneficiaries, with the remainder going to a designated charity; or
o a dynasty trust—passes wealth down through multiple generations.
- You want complex distribution instructions, which could involve blended families, beneficiaries with special needs, or beneficiaries who are prone to financial mismanagement or vulnerable to creditors. These scenarios may lend themselves to
o a spendthrift trust—protects assets from creditors and prevents beneficiaries from squandering their inheritance;
o a supplemental needs trust—enables a disabled beneficiary to receive financial support from the trust without affecting their eligibility for means-tested government benefits;
o an incentive trust—makes distributions to a beneficiary dependent on their meeting certain conditions, such as graduating, becoming employed, getting sober, or volunteering for charitable causes; or
o 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.
- You are exposed to unique tax liabilities related to situations such as having extensive real estate investments or business ownership. Possible trust solutions include the following:
o a qualified personal residence trust—allows for the transfer of a primary residence or, in some circumstances, a vacation home, to a trust while retaining the right to live in it for a set period or
o an irrevocable life insurance trust—holds a life insurance policy that uses the death benefit proceeds to cover estate taxes or provide liquidity to a business after your death.
Estate planning attorneys often emphasize that every adult, no matter their age or wealth level, needs an estate plan. It should start with a will, but depending on your financial and family situation, a trust can be a valuable addition to your plan. If you think a trust may be right for you and your family but are overwhelmed by the number of options and their range of uses, set up a time to talk with us about the different trust types and the benefits they offer.
1 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-olderboomers-pass-away-211151632.html.
