When you create an estate plan, you can simply use a will to pass assets to a specific beneficiary. You list the assets and the intended beneficiaries, and the estate executor handles the distribution.
But you can also use a trust, placing your assets into that trust and choosing a trustee to administer it. You still designate a specific beneficiary. There can be some advantages to doing this, and two examples are noted below.
The beneficiary does not own the assets
To begin with, if you leave someone an inheritance, it becomes an asset that they own. But if you put the same asset into a trust, the trust owns it, rather than the beneficiary.
This is one of the main reasons that people use a special needs trust. Because the beneficiary does not own the assets, they can still pass the means test and qualify for government benefits. If they were left the inheritance directly, it may disqualify them until they spend it down.
You can have more control
Additionally, directly leaving someone an inheritance gives them the ability to use it however they want. But a trust can give you more control. You can choose a specific use for the money, such as saying that it has to be used to pay for college tuition and other educational costs.
Even if you do not want to choose a specific use, you could just create a discretionary trust, where the use is left up to the trustee themselves. This is sometimes done if you are concerned about how a beneficiary would use their money. You can choose a trustee to approve and authorize payouts, meaning that the beneficiary does not have as much freedom to make their own decisions regarding how they would like to spend the money.
Setting up a trust
There are many different ways to use a trust, and this only highlights two of the potential benefits. But it helps to demonstrate why it is important to understand all the options you have when creating an estate plan.