When people hear about trust funds, they often imagine very wealthy people leaving vast sums of wealth to their children. But it’s not necessary to have a fortune to establish a trust. In fact, if you have minor children, establishing a trust to protect their inheritance is one of the most important gifts you can give your children.
Here’s why.
Avoiding Guardianship of the Estate
If you leave money directly to a minor child, a probate court may need to appoint a guardian of the estate to manage those funds until the child turns 18. This process is expensive and time-consuming. The guardian must report to the court, seek approval for expenditures, and comply with ongoing reporting requirements.
Establishing a trust for your children avoids guardianship over their inheritance. Instead,the funds will be managed privately by a trustee you choose. If funds are minimal, you can direct that the trustee distribute the remaining trust funds to your children when reach 21 years of age. If funds are more substantial, you can create a generational trust structure, designed to provide longer-term management and protection. It’s up to you and the goals you want to accomplish.
Choosing Who Manages Your Children’s Inheritance
Without a trust, a judge who knows nothing about you or your values will decide who manages the money you leave behind. With a trust, you make that decision yourself. You can name someone you know and trust to handle your children’s inheritance responsibly. You can also leave guidelines for how and when those funds will be distributed for your children’s benefit.
The trustee you choose can be a friend or family member you trust. If you can’t think of anyone you know who you’d trust to manage your children’s inheritance, it is also possible to name a financial institution or corporate trustee to manage the trust assets. The important thing is that you get to make the decision rather than leaving it to the court.
Controlling How the Money Is Spent
A trust lets you give your trustee guidance on how you want your children’s money used.
For example you likely want funds to be used to support their personal growth, enrich their experiences, help them pursue their dreams. But you might also want to encourage your children to pursue an education, develop a strong work ethic, be productive during their working years. In other words, you may want the trust to supplement their needs rather than become the sole source they rely on for their support.
You also might not want distributions made to a child who is financially irreponsible or who is struggling with addiction.
Those are all the types of guidelines you can include for your trustee to encourage your children to become productive members of society.
Deciding When Your Children Get Full Control
Under a guardianship, your children would receive their full inheritance at 18.
Most 18-year-olds don’t have the financial maturity to manage a significant sum of money. A trust lets you delay distributions, or stagger them over time.
For example, you might provide for terminating distributions at 25, 30, and 35, giving your children time to mature. Staggering distrubutions also means that if a child mismanages a the distribution they receive at a younger age, they will hopefully be better equipt to manage the later one.
Or you might decide that the trust should endure indefinitely. Instead of terminating distributions, you could permit the beneficiary to take over as trustee. This arrangement would allow for long-term asset protection for the beneficiary.
Trusts Are Not Just for the Wealthy
You don’t need to be wealthy for your children to benefit from a trust. A trust can be created in your Will and funded after you die. It costs nothing during your lifetime and only comes into existence under circumstances you choose, which makes it a great tool for many families.
If you have minor children, a creating a trust for them should be an essential part of your estate plan.
