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Should You Trust a Trust

Thursday, December 08, 2016

Did you know that if you die with minor children, any money you leave them will be given to them in a lump sum at the age of 18? What would you have done if you received a large sum of money on your 18th birthday? Would you invest it or use it for your education? Maybe you would put a down payment on house and plan for the future? We all know the likely answer is NO! Most parents feel that a large sum of money is too much for any 18 year old to handle. For many, the money would likely be blown in a few years, if not months. So if you don’t want this to happen to your child, what do you do?

You can create a legal entity called a Trust. Trusts are legal entities that may hold and use assets for a beneficiary (your son or daughter) but have them managed by a trustee. Trusts for minors are usually set up by parents or relatives who want to leave property to an underage person, but also want a trusted adult (the trustee) to care for the property until the child is old enough to be financially responsible. A Trust can be extremely versatile and you can choose how you want money distributed and when you want it to be distributed. You can even name who would inherit the money if your child dies before the trust has terminated. Trusts allow parents to maintain a certain level of control while protecting their child’s future. There are several different types of trusts.

A Staggered Distribution Trust is a popular planning option. This trust allows the distributions of the trust money in whatever portions the parent decides at multiple ages. For example, you could decide to give 20% of the money to the child when they turn 25, 35% at age 30, and the remaining 55% at age 35. A provision can also be added that gives the Trustee the ability to withhold the distribution if in the Trustee’s opinion the child has not shown financial responsibility until a later date.

Incentive Trusts are often used by parents to provide money to their children as long as their children do certain things. For example, a parent may not allow a child to access to trust money unless he or she graduates from college/trade school or maintains a full-time job for a certain amount of time. A parent can also refuse to allow their children to access the money if they are abusing drugs or alcohol. But remember, it is important that the trust provisions cannot violate public policy. For example, they cannot require that your son divorce his wife to gain access to the funds.

Another popular trust is called the Spendthrift Trust. Spendthrift Trusts restrict the amount of money that may be spent by the beneficiary (your son or daughter). Instead of your child making decisions on how the trust will be spent, the trustee has the discretion and authority to decide when and how much money the child will receive based on the child’s needs. It is typically for health, education, and maintenance of the child which includes medical bills, tuition, etc. This type of trust also has an additional benefit. Spendthrift trusts assets generally cannot be seized by creditors of the beneficiaries because the money is not in their control. The creditors cannot demand that the Trustee pay them directly. The assets can only be seized once a dispersal is made to the beneficiary. For example, the Spendthrift Trust has $100,000.00 in assets. The Trust directs the Trustee to disperse $10,000.00 a year to the beneficiary. The creditors can only seize that $10,000.00 after the dispersal is made. The remaining $90,000.00 generally cannot be seized until it is actually dispersed.

There is much to consider when planning your estate, especially if you have minor children. Every estate plan is different because every family is unique. The best way to decide what plan would best fit your family’s needs is to consult with an experienced attorney. Once you and your attorney have discussed your situation and your family’s needs, you can make a plan that protects your children and your assets. You will not have to wonder will my child make the right decisions? Instead, you can wonder about the bright future that they will have because you planned ahead. Hmm, I wonder...will they be doctors or lawyers?