Little in life is as simple as we hope or imagine. Having spent most of my legal career working in the estate planning field, I am still surprised by the little ways that a failure to plan can defeat the language in a legal document. Some people have legal documents, but no plan. This makes it all the more likely that the document will not do what it says.
At lot of us become more aware of the need to have an estate plan when we become a parent. We want things to be simple even when we aren’t balancing the responsibilities and stress of parenthood. Unfortunately, it’s not so easy. As a parent, you undoubtedly want to ensure that your child is financially secure in the event something happens to you. Your minor child cannot, however, inherit directly from your estate. So a Last Will and Testament drafted and signed without planning might fail to account for how that child should inherit if you die while that child is still a minor — or even a young adult not prepared to make good decisions. The trust attorneys at Clarity Legal Group® can help you plan by using a trust to protect your child’s inheritance.
Why Your Last Will and Testament Isn’t Enough
Like most people, you probably executed a Last Will and Testament as your first estate planning document. That Will likely continues to serve as the foundation of your estate plan today. While a Will can effectively distribute your entire estate after your death, you will need more than a Will to adequately protect the inheritance of a minor child. A minor child cannot legally inherit directly from your estate. If you leave your minor child gifts in your Will, without making any additional provisions, a court supervised guardian may take control of those assets until your child turns 18, at which time the inheritance will given to the child even if they are not yet ready to make good decisions about the management and use of the money. It is for this reason, and others, that a trust is often a better choice as a vehicle for passing down a minor child’s inheritance.
How Does a Trust Work?
A trust is a fiduciary legal arrangement that allows a third party, referred to as a Trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. All trusts can be broadly divided into two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Last Will and Testament. This trust has no assets and does not exist until created after your death. Conversely, a living trust activates during your lifetime, is a vehicle through which you personally manage your assets during your life, providing for the efficient management of the assets by someone else of your choice should you become incapacitated and at your death. Living Trusts can include sub-trusts built into the same Trust Agreement which serve to manage assets for any beneficiary of your choice. Usually, a Living Trust is a revocable trust that can be amended or modified by the person for whom it is created and named any time they wish. The trust becomes irrevocable at the creator’s death, meaning the rules cannot be changed and that any new trust or sub-trust which arises under it is also irrevocable.
Using a Trust to Protect Your Minor Child’s Inheritance
These trusts arising under a Living Trust after your death are the best vehicle for managing any inheritance for a child greater than a few thousand dollars. By using a trust to hold assets intended for your child, you are able to appoint someone of your choosing as the Trustee of the trust. The Trustee is responsible for protecting and managing the trust assets for the duration of the trust. Typically, the Trustee would be directed to provide for anything the child might need for support, health care, and education. A trust for a child like this might function as an asset protection trust for the child’s entire life, or you might provide for staggered distributions after the child completes his or her education and reaches certain age hallmarks. This avoids the risks of asking a young adult to make decisions about a large lump sum inheritance.
I strongly recommend that if you choose not to provide lifetime asset protection for your child and instead allow for the staggered distribution of these trust assets, that your directions for these distributions provide not that they be made upon the child reaching certain age hallmarks but instead that they be available upon the child’s request after certain age hallmarks are reached. This lets the child manage the protection afforded by the trust some himself or herself. If you plan to use this approach, you will definitely want to work with an experienced estate planning attorney who can help you anticipate some of the contingency planning which would be necessary were your child actually facing a tax or creditor problem.
Planning for your child through your own Living Trust also has the advantage that the inheritance does not go through probate. This will save money, time, and frustration.
Contact a Chapel Hill Trust Attorney
If you have questions or concerns relating to the use of a trust to protect your minor child’s inheritance, please contact a Chapel Hill trust attorney at Clarity Legal Group® by calling us at 919-484-0012 or contact us online.