I used to think trusts were only for the wealthy.  I now know that is not true.  Instead, the identity of the beneficiary is usually a better indicator of whether a trust is necessary in an estate plan.  For instance, a minor child is unable to manage property and transact business.  This is true regardless of the value of the property that the child stands to inherit.  Therefore, a trust should be used when there is a minor beneficiary of an estate plan.

The Child’s Trust – Basic Elements and Terms

A trust is a legal entity that owns property which is then used to benefit the beneficiary of the trust.  The person who manages the property held in the trust is called the trustee.  The trustee manages the property for the sole benefit of the beneficiary.  In the context of the Young Family, the beneficiary is the minor child.

The trust used in the Young Family’s estate plan is often referred to as a “Child’s Trust.”  In most cases, the Will establishes a separate trust for each minor child who is the beneficiary.  The Child’s Trust is designed to inherit property for the benefit of the minor child if both parents have passed away.

The Child’s Trust – Why it is Necessary

A Child’s Trust is a necessary component of the Young Family’s estate plan because it inherits assets on behalf of minor children.  A typical estate plan for the Young Family includes a Will that gives all assets to the surviving spouse on the first spouse’s death.  But what happens if there is no spouse, or if the first spouse has already passed?  Without an estate plan that includes a Child’s Trust, complex and expensive problems arise.

Many believe that a parent or other relative could accept inherited assets on the child’s behalf.  But without an estate plan, that is not automatically true.  Depending on the type and value of the assets, a legal proceeding known as a conservatorship may be necessary.  Conservatorships are extremely time-consuming, expensive, and require ongoing reporting to the court.

The Young Family avoids costly issues such as conservatorship proceedings through good estate planning.  The typical Will in the Young Family’s estate plan establishes a Child’s Trust that inherits property for the benefit of any minor children on the second spouse’s death.  The property is then managed for the benefit of the children by a trusted friend, family member, or financial institution appointed by the parents.

The Child’s Trust – Choosing the Trustee

The parents, in their estate plan, specify who should be the trustee.  Without estate planning, parents have no control over who should manage the assets for the benefit of their children.  For instance, one set of grandparents may claim that they should have control of the assets.  The other set of grandparents may disagree completely.  The parents may have had somebody completely different in mind, such as a sibling, a close friend, or a financial institution.  Without an estate plan, this important decision will be in the hands of the judge.  The judge’s determination may be contrary to the parents’ wishes.  But with estate planning, the parents in the Young Family can specify who should be the trustee, and that designation will control.

The Child’s Trust – Age of Distribution

With no estate planning, the conservatorship that I mentioned earlier will terminate once the minor child turns nineteen.  This means that whatever assets remain in the conservatorship at that time must be distributed directly to the child, regardless of maturity level, money management issues, addiction, or other issues.

The Young Family’s net worth may be higher than they expect.  Many Young Families have life insurance policies, retirement accounts, investment accounts, and equity in real property.  Combine these assets, and the value could be greater than one million dollars.  Without a Child’s Trust, a nineteen-year-old could come into complete control of hundreds of thousands of dollars (or more) years before that child’s frontal lobe is fully developed.

With estate planning, the parents in the Young Family specify when the Child’s Trust should terminate.  Many of my clients use a staggered approach to distribution.  For instance, some clients specify that half of the balance in a Child’s Trust should be distributed when the child turns twenty-five, and the remaining balance should be distributed when the child turns thirty.  Some parents would rather the trust distribute and terminate earlier than that, and some parents would rather the trust distribute and terminate later.  In some cases, the Child’s Trust should not terminate at all and instead be held for the lifetime of the child.  Thoughtful conversation between the Young Family and their attorney will lead to the best plan for each Young Family’s particular circumstances.

The Child’s Trust – The Tip of the Iceberg

There is so much more I want to discuss about the Child’s Trust.  But my goal in this blog series is to be informative without being overwhelming.  The topics discussed in this blog are just a few of the reasons that a Child’s Trust is an essential component of the Young Family’s estate plan.

In next week’s post, I will discuss another important aspect of the Young Family’s estate plan: the appointment of a guardian for minor children.

If you have any questions or would like to schedule an appointment to discuss estate planning, please call me or send me an email.  You may access my contact information by clicking the “view profile” button linked below.

Disclaimer

This blog series is meant to be informational only.  This blog series discusses general principles associated with estate planning for the Young Family, but your specific situation may differ slightly.  Therefore, this blog series is not meant to provide specific legal advice, and it does not create an attorney-client relationship unless one is specifically entered into by you and Rosen Harwood, P.A. 

For previous blogs in the series on Estate Planning for the Young Family, see the link here.