trust fund

If you have already begun the estate planning process, you know how important it is to choose the right agents to be in control of your assets and healthcare decisions. Unfortunately, you may not have the same faith when it comes to your children—especially if minor children have shown signs of poor money management. Even if the assets you leave to minors are held in trust, the agent in charge of the trust will be relieved of duties once the child turns 18. Without careful planning, an inheritance can be squandered long before your child has children of his own.

How to Ensure That Your Children’s Inheritances Will Last a Lifetime

The creation of a trust is the first step to providing your children with a reliable and sustainable inheritance. However, parents do not have to give a child outright control of assets at the age of majority—or even full control of all of the assets in the trust at any one time. Before finalizing a trust to provide for your children, it is important to consider:

  • Risks of “ages and stages” distribution. Rather than disbursing all the funds at once, trusts can stipulate that the beneficiary receives money at certain intervals. For example, in a 25/30/35 arrangement, the beneficiary receives a quarter of the assets at age 25, another quarter at age 30, and the remaining balance at age 35. While this avoids giving the beneficiary all of his inheritance in a lump-sum payment, it can present certain problems. Once the beneficiary withdraws trust funds, the money becomes theirs rather than being owned by the trust. The withdrawn funds are now subject to creditors and taxation, and can be considered a marital asset when divorcing a spouse.
  • Pot trusts vs. separate trusts. If you have multiple children, you have the option of creating one trust divided into separate shares, or creating a separate trust for each child. The approach you take will depend on the needs of your children (such as if one child has special needs) and the resources available to each child.
  • Gift savings accounts. Gift savings accounts offer a way to pay for early adult expenses (such as college and school fees) while giving your child a chance to handle their own money. The Uniform Gifts to Minors Act (UGMA) allows parents to give cash, stocks, bonds, and insurance assets to underage beneficiaries tax-free up to a certain amount. The Uniform Transfers to Minors Act (UTMA) allows the transfer of any assets, including real estate, works of art, and intellectual property. When the child comes of age, he or she assumes control of all assets in the account.
  • Lifetime trusts. A lifetime trust may be the wisest choice for children who need maximum liability protection, such as an heir who is likely to be sued, have a drug addiction, get divorced, or rack up considerable debt. The trustee retains control over the trust and may distribute money at her discretion, but the child does not have the right to demand or withdraw large portions of cash.
  • Powers of appointment. After your death, your child may be given the opportunity to make provisions for their own children through “powers of appointment.” These provisions may be used to restrict your grandchildren’s access to funds, allow a child’s spouse to be named as an heir, or direct funds if your child dies when there are still monies held in trust.

Financial Involvement Is the Best Way to Protect Your Family Wealth

After you put a considerable amount of effort into building your wealth, it may seem like it is best to keep financial matters a secret from your children. Frugal parents who restrict their child’s access to funds may think that they are protecting their kids, saving what they have earned in order to pass it on to the next generation.

However, the key to maintaining a strong financial position is to get children involved early. Your kids should have a reasonable allowance, know how to budget, and experience delayed gratification even if you can afford to give them everything they want. As they get older, they should be taught about common financial products, risks, and scams. When they come of age, it may be a good idea for your child to make a few investment decisions or serve as co-trustee so they can become used to managing the trust money.  

At Yolofsky Law, we don’t just draft documents. We ensure you make informed and empowered decisions about life and death, both for yourself and the people you love. As your Personal Family Lawyer®, we can help you articulate your wishes for your future care and legally protect your loved ones and finances for years to come. Give us a call today to discuss your options with our trusted advisors.

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