By Associate Attorney Danielle Nodar
Many people associate “trust fund babies” with millions of dollars, royal babies, and celebrity kids, but with proper estate planning, anyone can leave their children a trust fund to provide for them once both parents are gone. The goal is to make sure your children’s basic needs are met, not to spoil them. By using either a revocable living trust or testamentary trust, parents can create a plan for how money will be used for their children’s care if both parents pass while a child is still too young to manage money on their own.
A trust is an agreement where the settlors, the creators of the trust, entrust money and other assets to a trustee for the trustee to hold, manage, and ultimately distribute to named beneficiaries upon the happening of some event. Without utilizing a trust, the law generally allows for any adult, meaning anyone eighteen or older, to inherit money outright, regardless of their maturity level, ability to manage finances, or the amount of money being inherited. Prior to turning eighteen, assets inherited by a child will be kept in a custodial account to be managed by a surviving parent or legal guardian. The adult in charge will manage the money for the child’s benefit and can use the funds for the child’s education, support, health, and maintenance until the child turns eighteen and inherits the remaining assets outright.
A testamentary trust or revocable living trust allows parents to name a trustee to manage any inherited assets for children until the child inherits outright according to the terms of the trust. The Trustee will be managing the estate assets and making distributions of the funds for your children’s care according to the terms of the trust. You can give the trustee a lot of discretion over what the money can be used for. They also will be able to seek professional guidance to assist them with managing funds, as part of their job requires them to make sure that the estate assets continue to accrue income while the trust is in existence. Finally, the Trustee does not have to be the same person as the person who you name as a legal guardian for your children. If you think one person would be better suited as a caregiver and another would be better at managing money, you can have both people serve in different roles and work together in making sure that your children’s needs are met.
You can control the age and conditions in which your children will inherit funds outright. You can break up the distribution into different percentages at different ages so that children are not inheriting everything in one lump sum. For example, you can have a child inherit 25% at age 22, then another 25% at age 25, and the remaining assets at 30. During this time, the Trustee will still be making distributions for a child’s health, education, and support, but the child will get additional distributions of larger sums of money as they are more capable of making financial decisions on their own. A trust also allows you to give the Trustee discretion to distribute additional funds for whatever you’d like, such as travel, weddings, and purchasing a residence. Finally, you can name either trust as a beneficiary of a life insurance policy, which would allow any money that a child was to inherit to instead flow through the trust to be administered according to the trust’s terms. Without this, a child could ultimately inherit the entire proceeds from the policy at eighteen.
As you can see, all parents, and not just those who are royalty, celebrities, or have millions of dollars in assets, can benefit from having a trust for their children’s benefit included in their estate plan, as it allows you to name a trusted adult manage funds for your children if you are no longer living, and it also allows you to implement conditions and instructions for how money will be used and ultimately distributed. If you have questions about the best option for your family, please call Jesson & Rains!
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