Parents often create a revocable living trust to ensure that their children are provided for upon their deaths. However, parents may struggle to decide how to leave an inheritance to their children and how much control they wish to exercise after their deaths. This is especially the case when parents have young children or children who struggle with financial responsibility. Fortunately, there are a variety of methods to leave property to your children and these methods may be customized to fit your family’s needs. Here are some questions to ask yourself when you are planning for your children.
1. Is My Child Mature Enough for an Outright Distribution?
If your children are mature adults, and you have no concerns about their ability to manage money, you may decide to have distributions from your trust go outright to your children (not in trust). I generally recommend outright distributions be delayed until the child is at least 25 years old. Some parents think 18 years old is old enough, but, based on what I have seen in my practice, not many.
An approach that we use a lot in cases where the children are immature because of their ages, rather than their personalities, is to allow the trustee to make large distributions to the children at several different ages. By far the most common ages chosen by my clients is 25, 20 and 35. I like to encourage my clients to think about maybe making that first large distribution a relatively small one, instead of three equal distributions. That way, if you made a mistake assuming the child would be mature at age 25, you have only made a mistake as to a small amount of money.
2. Am I Concerned About What Would Happen If My Child Divorced?
This is a very common concern for my clients. Divorce can be a financial setback and many of my clients would not want to see the estate they leave for their children end up in the hands of a divorcing son- or daughter-in-law.
Most readers understand that there is a difference between community property and separate property. In heritances are separate property, so if your child does inherit money from you, in theory, that inheritance is your child’s separate property and should not be safe from being divided up with a spouse in a divorce. However, what we also see in our practice is that not everyone does a good job of keeping their separate property separate. If you took your inheritance and deposited it into a joint account that you have with your spouse, the money has been “commingled”. This is a fancy word for “if you divorce, we are going to have to do a lot of forensic accounting to separate this account into separate and community property.” It’s not what you want your child to do, and if you are concerned about it, maybe an outright distribution to your child is not the right way to go.
3. Am I Concerned About Creditors?
You may also decide that you would like protect your child’s inheritance from creditors. Any one of us could be involved in a car crash that could result in a lawsuit. Our clients protect themselves and their own assets from that kind of liability by having enough insurance. To protect your child’s inheritance from being taken away in a lawsuit you might consider setting the inheritance up as an “asset protection trust.” This 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 as trustee after they reach a specified age. This can protect the assets from creditors, even government creditors (think IRS) if set up and administered correctly.
4. Do I Want to Make Sure My Property Remains in the Family?
Even if a child has a happy marriage, is mature and responsible and has no creditor concerns, for many of our clients it is very important to guarantee that their money will continue to improve the lives of their children, their grandchildren and beyond, if possible. Again, the way to control what someone does with the money you leave them is to require the money be held in trust for that beneficiary’s lifetime, then for the next generation’s lifetime, and so on.
5. What Can I Do to Be Fair to All of My Children?
When we are planning for a family with young children there is an additional wrinkle that we want our clients to look at. Here’s the scenario I use to explain this: On mom and dad’s death the two children are ages 23 and 20. The 23-year-old has graduated from college already, paid for by mom and dad. The 20-year-old still has 2 ½ more years of college. If mom and dad’s trust requires that it be split into two equal shares, the older child is essentially getting a larger inheritance because that child will not have to pay for college out of the child’s share. College has already been paid for by the family. The younger child will be using some of the inheritance to pay for college, something the older child did not have to pay for.
There are ways to draft a trust so as to be a little more fair to the younger child in this scenario. We can create a “common pot” trust, which allows the trustee to use the trust money in much the same way that you would have used it for your children if you were still living. Most parents don’t keep track of how much money they spend on each child throughout childhood. There is no ledger that needs reconciliation. That could mean maybe the money was not spent equally, but the idea is to make sure that all of the children get what they need by having the family pay for it, not an individual child. For example, you might pay for one child to attend community college and another to attend UC Stanford, without keeping track of whose education cost more. This “common pot” trust allows your trustee to provide for your children based on need and not just equality.
6.Who Will Manage My Child’s Money?
Unless your children are mature and responsible enough to receive their inheritances outright after your death, someone will have to handle the money for a few years or many years. We always try to discourage parents from designating a sibling of the child to handle the child’s money. That business/financial arrangement can cause damage to the personal relationship between your kids in some cases. Consider whether a neutral person would be a better choice as a trustee for this reason. Money can make people behave differently. I’ve seen family relationships deteriorate dramatically when one sibling is perceived as having more power because they are in charge of the money. There are licensed professional fiduciaries, corporate trust departments and even more distant family members or friends who could serve as your trustee and keep the finances out of your children’s relationships with each other.
Choosing how to leave an inheritance to your children is a personal decision. After all, you know your children best! We’ve given you some things to think about and we would love to talk to you about solutions that fit your unique family situation. Contact Absolute Trust Counsel today to begin the conversation.
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