Children who benefit from trust funds have frequently been portrayed unfavorably in the news, movies, and on television over the years. Often referred to as “trust fund babies,” they have been stereotyped as coming from extreme wealth. In reality, trusts can be a very powerful estate planning tool designed to safeguard your children in the event you die prematurely. Trusts can ensure that your assets do in fact pass to your children, and then further protect the children from themselves by making certain they do not overspend at an accelerated rate.
At your death your assets are typically directed by a will or, in the absence of a will, the intestate laws of your primary state of residence. Assets such as retirement accounts and life insurance are disbursed according to the beneficiary designations on record. If the recipient of your assets is a minor, a Conservator is assigned by the court to manage the assets until the child is of legal age to take possession. In many cases the Conservator is a family member you know and trust.
The Conservator is supervised by the courts to ensure the money is used properly. However, despite court supervision, we have heard countless stories in the news of Conservators taking advantage of their position and leaving the children with only a small portion of the estate when they reach adult age. Without clear direction, it can be easy to justify expenses that markedly benefit the Conservator the most and the children only a little.
A trust can ensure that assets are protected from abuse and used for very specific purposes. A trust is a legal entity that holds assets for a person or organization. They can hold assets such as money, real property, investments, business interests, personal property, and artwork, or a combination of the above. They can also serve as a primary or contingent beneficiary on retirement plans and life insurance policies.
At death of the grantor (the person who established the trust), assets are moved into and held by the trust. The trustee (the person assigned to oversee the trust), manages the assets and distributes them according to the instructions laid out in the trust document. The beneficiary then receives the assets for their personal use.
Many trusts have detailed language outlining what the assets can and cannot be used for. Common provisions include health, education, maintenance, and support (HEMS). This wording requires that the money is disbursed only for major expenses, such as medical expenses, a college education, buying a home, starting a business, or even caring for a child. This very detailed language can ensure the money isn’t misused or used for an unintended purpose.
Additionally, a trust can help protect the child from themself. Most people hope that their children become financially responsible individuals. Unfortunately, that isn’t always the case, especially when they are young. A trust allows you to control when and how much money is distributed at one time. For example, you could set up a monthly disbursement almost like an “allowance,” or something more occasional like monthly, quarterly, semiannual, or annual distributions. By spreading out the distributions, you can ensure the money is not spent too quickly and is available to support the child for a longer period of time.
Many trusts do eventually give the beneficiary access to larger portions of the assets. For example, it is not uncommon for a trust to give the beneficiary access to 50% of the assets at age 30, another 25% when they reach 40, and the final 25% at age 50. Afterall, most people’s intention is for the beneficiary to enjoy and benefit from the assets. At some point they need to get broader access to be able to accomplish that.
Overall, trusts are an excellent tool to help safeguard your pre-adult children in the event you die. It can ensure the assets go to your children and are not misused by those tasked with caring for them. They can also protect your children from themselves and make sure they are not spending the money irresponsibly.
To determine if a trust can be a useful estate planning tool for you, speak with your estate planning attorney. They will be able to explain in greater detail how the trust functions, how it accumulates assets upon your death, and your options for directing use of the assets in the years after your death.
Jeff Witz, CFP® welcome readers’ questions. He can be reached at 800-883-8555 or firstname.lastname@example.org.
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