There are so many ways for parents to leave inheritances to their children as you can imagine. These are a few of the common approaches that parents seems to like, each of which can be tailored to a given family.
IF YOUR CHILDREN ARE MATURE ADULTS: Outright Distribution
If your children are adults, and you have no concerns for their ability to manage money or about outside influences, you may decide to have distributions from your trust go outright to your children (not in trust).
IF YOUR CHILDREN ARE YOUNG ADULTS, OR IF YOU HAVE CONCERNS REGARDING THEIR ABILITY TO HANDLE MONEY, THE POTENTIAL FOR A DIVORCE, OR EXPOSURE TO CREDITORS, YOU MIGHT CHOOSE ONE OF THE FOLLOWING:
- Children’s Pot Trust – When children are younger, many families like a combined trust for all the children that we call a “pot” trust. This trust allows the person who will control the trust (the trustee) to use the funds in the trust in much the same way that you would have used them for your children if you were still living. You would use discretion to provide for your children based on their individual needs, which may not be equal between them. For example, you might pay for one to attend vocational school and another to attend UC Berkeley, without trying to make the distribution equal. This “pot” trust allows your trustee to provide for your children based on need and not just equality. This can be especially important if you have already paid for the education of one child, but have not begun or completed paying for the others. While everything is coming from one pot, the trustee can make sure the younger children get treated the same as you treated their older sibling. When the youngest child reaches a certain age or graduates from college, what remains in the “pot” can be divided into equal shares.
- Withdrawal Trust – When children are over the age of 18, each child’s share can be held in a separate trust for that child’s protection. You can decide how long you want the funds held in the separate trust, who will be named the trustee, and when the child can receive assets from the trust. You can decide how much the child will receive at specified ages over time. For example, you might decide the child can receive 10% when they reach age 25, 50% of the remaining assets when they reach age 30, and all of the remaining trust assets when they reach age 35. The ages and amounts can be specifically tailored to address your concerns or meet the individual needs of your child.
- Asset Protection Trust – You may also decide that you would like to keep what you are leaving to your child in a separate trust that will exist throughout your child’s lifetime. This type of trust is chosen when parents have concerns about protecting a child from outside influences such as creditors, concerns about a child’s ability to manage money throughout the child’s life, or worry about the impact of a child divorcing in the future. An “asset protection trust” allows the assets you leave to your child to remain in trust, either under the control of a trustee you have chosen, or under the control of the child after they reach a specified age, depending on the purpose you have for the trust.