Using Lifetime Trusts for Children in Your Estate Plan

As Benjamin Franklin told us over 200 years ago, “In this world, nothing is certain except death and taxes.” Nobody likes to think about death; whether their own or a family member’s. But an important part of your overall financial plan includes having a good estate plan in place to properly deal with your assets when you die.

When thinking about leaving assets to the family, many people think of the typical Last Will and Testament that leaves everything to a spouse or children, outright. However, the Last Will and Testament includes something called probate, a process by which a will is proved valid or invalid and the ultimate distribution of assets is supervised by the court. Probate can be expensive and can take a long time to get assets to your loved ones. To avoid probate, some people opt to have a revocable living trust. However, while many of those trusts do tend to leave assets in trust for a spouse, they still tend to leave the remaining assets to children either outright immediately or outright over a period of years. The typical scenario here is to parcel out the assets in 1/3 increments at 25, 30,and 35 years of age.

For some, this type of planning works well because either the asset value is fairly low or the child would use the inheritance right away to pay off debt, such as a mortgage or student loans. But, for others, a living trust is much more beneficial; especially in situations where the child could be what estate planning attorneys often refer to as a “spendthrift” or if they may be subject to creditors such as a delinquent debt, a divorcing spouse, or a professional liability. For still others, the children may be very young and the status of their potential future creditors is unknown. For each of these types of children, a lifetime trust may be a good solution. Essentially, the inheritance is held in trust for their entire lifetime, or until the principal has all been exhausted, whichever comes first.

There are two main ways to accomplish this depending on the type of beneficiary you are dealing with.

The”Spendthrift Trust”

First, there is the “spendthrift trust,” which is designed to protect the beneficiary from his or her own improvidence. Here, you may have a beneficiary who makes poor financial and spending decisions. This is the child who is more likely to be taken advantage of by friends who are short on cash this month, or the child who would buy a brand new Lamborghini and an around the world cruise, as opposed to the child who is more likely to invest the inheritance and spend it wisely.

For these spendthrift children, the “spendthrift trust” is a lifetime trust where someone else is the trustee. Typically, this is a corporate trustee since the child is likely to outlive a trusted friend or family member. Although this sometimes can be the child acting together with the corporate trustee guiding their financial decisions, typically the trustee has very broad discretion to distribute the assets of the trust for any reason in their sole discretion, which can create a very flexible trust.

The”Beneficiary Controlled Trust”

The second type of lifetime trust is what is called a “beneficiary controlled trust.” With a beneficiary controlled trust, the assets are held in trust for the child’s lifetime, but the child is allowed to be in control of the assets either immediately or upon reaching a particular age. Sometimes, clients take the “training wheels” approach where the child serves with another family member or a corporate trustee for a period of time before taking over the reins. Here, the child is likely going to be able to make good decisions on their own, but there is the potential for future (or sometimes current) creditors, which can include a divorcing spouse, professional liability, or personal liability.

The beneficiary controlled trust is often the approach that clients will use when the children are particularly young and there’s a bit of uncertainty as to what kind of financial decisions they are likely to make in the future. It is also the approach used when there is turmoil in the child’s marriage or the child is potentially subject to professional liability as a doctor, lawyer, or accountant. The great thing about the beneficiary controlled trust is that the child still has almost full control of the assets, but the provisions of the trust create a legal wall around the assets to keep their creditors at bay. For the right kind of beneficiary, this can be an extremely useful and simple tool to use.

All in all, there are many useful tools in the estate planning toolbox, each of which can be useful in the right situation. Lifetime trusts are one of those many useful tools. If you have any questions about whether a lifetime trust might be a useful tool for you, feel free to reach out to your trusted Moneta Group advisors.

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