Making financial arrangements for an untimely death isn’t fun to discuss; however, as Ben Franklin once said, “If you fail to prepare, then you are preparing to fail.” We wholeheartedly agree. And when it comes to premature death, many people think they’ve covered all the bases when, in fact, they haven’t.
Sure, most people create basic wills to pass money to their spouse or children outright. They also set up beneficiaries on their various investment accounts to reflect the same. Most of them stop there, not realizing the consequences if they do pass unexpectedly.
Another layer of protection
If you have young children (or even young adult children), it’s also good to consider setting up trusts for them within your estate-plan documents. Children’s trusts usually give beneficiaries an extra layer of protection from:
- their future spouses (or exes)
- the beneficiary themselves
What do we mean by that last one: protecting beneficiaries from themselves? Here’s an example. Imagine a family of three…a married couple and their five-year-old daughter. If both of the girl’s parents unexpectedly die, with no trusts set to spring up at death, their assets will be held aside for her in a conservatorship – with a guardian in control – until she’s of legal age (usually 18). Once she becomes that age, she’ll receive all of the money outright, in one lump sum, and be free to use it in any way she decides to do so.
Now, picture yourself as a young beneficiary, receiving a $1,000,000 windfall at the age of 18. You’d totally stick to a budget, attend college and invest the money wisely, right? Technically speaking, that may be possible; however, as we both know, there are many anecdotes to suggest that diligent money-management skills are not the norm at that age.
That’s why establishing a children’s trust is wise. It can ensure children’s needs are met, while also creating healthy boundaries between them and their inheritance.
Want to know more about this type of legal document? Here are some considerations when creating a children’s trust:
1. Choosing a trustee
Perhaps the most important factor is deciding who will be the trustee. The person you designate to serve in this role would be responsible for handling the trust’s assets and managing distributions to its beneficiaries. A trustee serves as the fiduciary, providing funds to ensure that your child lives comfortably, while also evaluating any requests above the allotted distribution (and declining them if the child’s spending intent for the additional funds seems reckless.) Ideally, a trustee is fiscally responsible, wise, and understands your wishes and intentions.
Trustees are often close family members. An alternative is to appoint a corporate trustee. Corporate trustees are a bit more expensive; however, they may be appropriate for trusts with significant assets or trusts set up to last for the beneficiary’s lifetime. (For instance, Uncle Bobby doesn’t have to seem like the bad guy for declining his young nephew’s request for money to buy a Porsche 911.)
2. Distribution ages
One question we often hear is, “When should the beneficiary have access to significant portions of the trust?” The most common distribution schedule is some form of a percentage of assets at pre-determined ages. For example, twenty-five percent of the trust will be paid out at 25, half at 30, and the rest at 35. This may be fine, as the distributions might coincide with important life milestones (e.g., graduating from college; buying a first home; starting a business or family). However, it also could create a scenario in which the beneficiary essentially “waits around” to turn a specific age to draw down on the assets, then splurges instead of using the trust to supplement his or her lifestyle.
If you foresee your child having difficulty with this in young adulthood, it may be better to keep the trust in force as long as possible, and allow him or her to be a co-trustee later in life (say, at age 35 or 40). By then, it’s more likely that your child will have developed enough life skills not to squander larger distributions.
3. Implement incentives
When a child learns of their impending inheritance, parents and guardians hope they’ll still be motivated to attend college; start a world-changing business; and lead healthy, productive lives. However, that’s far from reality, as some beneficiaries become complacent in these areas, knowing they have access to certain amounts of money.
To try to instill proper values, you could implement provisions within the trust to disburse funds upon completing certain requirements. Common incentives include: maintaining a certain college GPA, graduating from an accredited four-year institution, or even making a certain amount of money through legal employment. (Tom Glavine, former all-star pitcher of the Atlanta Braves, once revealed that a trust set up for his children would match their earned income up to $100,000 each year to incentivize them to continue working hard in life. Pretty smart, if you ask us!)
One final thought
All in all, setting up a trust can go a long way in ensuring an inheritance aligns with the goals and aspirations you have for your child or children. There’s a lot to consider, of course, but don’t let that deter you. Wills and trusts are living, breathing documents. As your children age and circumstances evolve, you can always modify the details to reflect those changes.
The information provided does not, and is not intended to, constitute as legal advice. Please contact your attorney to obtain advice with respect to any legal matter.