From the moment you first learned you were going to be a parent you probably started worrying about protecting and providing for your child. That need to protect and provide is likely evident in your estate plan because you want to be sure your child is financially secure if something happens to you. But simply leaving an inheritance behind for your child isn’t enough.
Why Should I Use a Trust to Pass Down My Child’s Inheritance?
Most people rely on a Last Will and Testament to pass on their assets when they die. While a Will can be used to distribute your estate, there are many reasons why you may not want to rely on your Will when it comes to the an inheritance intended for your minor child. Most parents don’t want to use a Will to leave an inheritance for a minor child because the child cannot legally inherit directly from the estate of the parent. If you gift assets to your minor child in your Will, an adult will have to be appointed to manage those assets until the child reaches adulthood. The court will choose the adult to act for your child and you will have lost the opportunity to provide directions or instructions on how you want those assets managed and finally distributed. Then when the child turns 18, he or she will receive everything in a lump sum, which most parents recognize is probably not the best option. A far better option is to use a trust to protect your child’s inheritance as you will be able to select who you want to serve and can provide very specific guidance on the investing, management and use of the inheritance for your child’s benefit. You can also delay receipt of the inheritance by your child to an older age than age 18–hopefully to an age at which your child will be ready to make better decisions.
How Does a Trust Work?
A trust is a legal relationship in which property is held by one party for the benefit of another party. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Trustor transfers property to a Trustee, appointed by the Trustor. The Trustee holds the property for the trust’s beneficiaries, invests the trust assets and administers the trust according to the terms created by the Trustor. Trusts are broadly categorized as testamentary or living trusts with the former coming into existence after the Trustor’s death and the latter becoming effective during the Trustor’s lifetime. For the parents of a young child, the ability to choose the Trustee and create the trust terms are powerful incentives for passing down a child’s inheritance in a trust instead of a Will.
Who Should Be the Trustee?
The primary job of a Trustee is to manage the trust assets and distribute those assets according to the terms created by the Trustor. For the parent of a minor child who plans to use a trust to guard the inheritance of that child, some important considerations in choosing a Trustee include:
- Willingness to serve – while there are numerous qualities that may make someone a good Trustee, none of those really matter if the individual is unwilling or unable to serve. All too often, people fail to sit down with a prospective Trustee and ask if he/she is willing to serve. There may be many reasons why someone would not feel comfortable serving, including grieving your loss and being emotionally unable to handle the job.
- Experience/skills – it is tempting to appoint a spouse or family member, but your Trustee needs to understand the laws and financial concepts necessary to successfully administer the trust. If your spouse or family member lacks these skills, you may wish to consider appointing a professional Trustee.
- Willingness to honor your wishes – a Trustee is required to follow the trust terms as written by the Trustor. A Trustee must also have some discretion. Make sure you appoint someone who will honor your wishes as stated, even if he or she doesn’t agree.
- Absence of conflicts – try to appoint someone who is not likely to have a conflict of interest with the trust beneficiaries. This is another reason why a professional Trustee is often the best option.
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