Nine things you should consider when setting up a trust for your child
As a parent, you must decide how you want to leave your assets to your children when establishing a trust.
While each family has its own unique situation and its own children, here are nine considerations everyone should keep in mind.
1) Trusts should always be established for minor children’s assets
Children under 18 are known as minors, and it is wise not to leave any assets to them until they come of age. You can appoint a guardian or conservator to handle their finances for them until they reach a certain age. However, you may want to keep your eyes open when appointing the guardian.
If a relative you trust has a cozy home and a good relationship with your children, it does not mean they are qualified to be a good guardian of their finances. If their finances are always messy, and they neglect their responsibilities, you must leave the kids’ inheritance in the hands of a more qualified trustee.
2) It’s not easy being 18 years old
Certain states require guardians to transfer assets to children as soon as they turn 18. However, most 18-year-olds are likely to spend the trust money on a lavish lifestyle they cannot afford.
A lump sum of $5 million may seem to last forever at first, but it will soon be squandered on trivial things, and after 20 years, when they need funding, they will have none. However, if they are wise and live modestly, they may benefit greatly from it.
3) Is the trustee you’re choosing right for the role?
Choosing the wrong trustee is a common mistake parents make when they create a trust. Having a great relationship with your brother or sister (your children’s aunt or uncle) does not mean they will make great trustees.
Perhaps this family member may not want to have financial control over your children’s assets, even if he or she agrees to take on the role for your sake. Or if they refuse to provide your children with financial support before they are eligible and don’t have their best interests in mind.
4) Children in their 20s should have separate shares
When you have adult children, you will usually allocate each child’s share of the trust money. Your kids will then have their own money, and they can take it when they need it. It’s an equitable approach because different children have different needs. The other children should not have to pay to send one child to medical school.
5) Consider the option of a lifetime trust
Another important thing you need to consider is whether the money should be distributed outright to the children when they reach a certain age. If you give your children the right to withdraw trust money, that money becomes their own property, and they can be taxed on it.
It is better to place the funds in trust for the child’s lifetime. Trustees could distribute money at their discretion, but children would never be able to demand cash payments. In the event that you are concerned about a child having creditors or divorce in the future, this is the best course of action.
6) Make sure your ‘problem’ child is protected
An excessive sum of money given to a child with a substance abuse history, such as drug addiction or gambling, could have fatal consequences. Keeping a child secure from self-harm is only possible through lifetime trust.
7) Longer leashes for your kids
If you think your child is capable of handling the money at a certain age, give the child a quarter of the assets at 25, half at 30, and the remainder at 35. You can distribute the assets based on percentage or age. Another suggestion is to include the child as a co-trustee at 25, so he or she becomes familiar with managing the trust funds.
8) Annual review of the trust
You may have designated a responsible family member as a trustee when setting up the trust fund. However, after five years, you may forget about the designation, but that family member perhaps accumulated a criminal record. Do you still want them to be in charge of your children’s finances with that person?
Your trust should be reviewed every year to ensure it is still in line with your desires and current reality, just like your life insurance, investments, and overall financial planning.
9) Planning for the death of a child
When a child dies, and there are still funds held in trust, what happens to the money? If your child has children, you have the option of giving the funds to their children or to your other children.
Often people specify that their children have the right to decide what to do with their money after they die. The idea is that after your death, your child should be able to alter the distribution of the trust funds among his or her own children. These are called “powers of appointment.”
The grandchildren may face some of the same challenges as your children did – creditors, divorcing spouses, and addictions. It is important that your child can change the distribution of the trust if necessary. You may also give your child the option of leaving the trust to their spouse.
While some strongly oppose it, not every family faces the same challenges. If your child is married to a loving partner and lives prudently, you may want them to continue living the same lifestyle they had when your child was alive.
Take time to consider all the factors
Planning to leave assets in trust for your children requires you to consider a number of factors. If you don’t take the time to consider them, planning for your children’s future may be difficult. Your attorney can always make suggestions concerning the trust, and then, as your decisions solidify over time, you can make adjustments to the trust.
Photo by Annie Spratt