Traditionally, a child’s inheritance would be left in a trust only if the child was young, disabled, a spendthrift, or otherwise unable to manage or conserve significant amounts of money. The modern trend, however, is to leave property in trust for almost all children, even those children who are adult, mature and responsible. Most estate planners now recommend such trusts because they know that an inheritance left in trust will be better protected from potential divorces, creditor problems and additional taxes. A properly designed trust can protect your child’s inheritance from a variety of possible misfortunes and yet provide the child with virtually unrestricted access to the inherited assets.
In the case of young children, it is obviously better to leave their inheritance to them in a trust rather than outright. Leaving significant property to a child to be received at age 18 or in his twenties or thirties may be a great disservice to the child and may cause more harm than benefit. Most of us have known of someone who received “too much, too soon.” Such children often suffer serious developmental problems and may never acquire a satisfactory level of maturity or responsibility. In most cases it is preferable to leave property in trust for children so that the property will be properly managed and administered for their benefit and will ultimately pass to them at a more mature stage of their lives.
Traditionally, trusts for younger children were designed to pay out at later ages. For example, the child would receive one-third of the principal at age 30, another one-third at age 35 and the remaining one-third at age 40. Earlier or later ages might be selected depending on the maturity level of the child and the philosophy of the parent. The idea was to distribute principal in stages so that if the child was wasteful or otherwise imprudent with the first partial distribution, hopefully he or she would have acquired some additional maturity by the time the next partial distribution was made.
Modernly, most estate planners have come to realize there are significant advantages in eliminating mandatory distributions at specified ages and permitting the child to receive the protective benefits of the trust throughout his or her lifetime. If the trust assets are required to be distributed, then they are no longer protected from divorces, lawsuits, creditor problems, and other possible hazards.
A better approach for most children is not to require distribution at specified ages. Rather, the inheritance should be permitted to remain in trust where it will be protected throughout the child’s lifetime. If the child is mature and responsible, you can name the child as Trustee of his or her own separate trust. Under that arrangement, the child will be in complete control of his or her inheritance and will be able to make investment decisions and spending decisions with no significant restriction. Yet, the inheritance will be better protected from life’s many hazards.
Another advantage of a trust that remains in effect throughout your child’s lifetime is that it provides some assurance that remaining assets will ultimately pass to your grandchildren or other intended beneficiaries. Alternatively, if property is left outright to your child, then upon your child’s death it will likely pass to his or her spouse. Even though you may love your daughter-in-law or son-in-law, you may feel a greater duty to protect and provide for your grandchildren. A properly designed trust will assure that assets which remain at the time of your child’s death will pass on to those grandchildren if that is your wish.
For those families with significant wealth, a major concern may be the avoidance of unnecessary estate taxes. A trust that remains in effect throughout your child’s lifetime may save a huge tax that would otherwise be paid by your grandchildren. Such trusts can be designed so that even though your children are in complete control of their inheritances, the inherited assets will not be included in their estates for estate tax purposes at the time of their deaths. In many cases, this type of trust will double the after-tax dollars to be inherited by your grandchildren when your children are deceased.
Because divorces, lawsuits, bankruptcies and similar risks are so prevalent in today’s society, it makes sense to take advantage of the protection that a trust affords and to leave your children’s inheritances in a manner that will be safeguarded throughout their lifetimes. The realization has led many wealthy families to establish “dynasty trusts” that will protect their legacy for many generations to come. Regardless of the level of your family’s wealth, your children and their descendants will be well served to receive their inheritances in the form of a protective trust.