Planning They Will Thank You For: Specialized Estate Planning for Children
By Amy LeFore
SAALFELD GRIGGS PC
As parents, the age old question has always been how much freedom to give your children. In the world of estate planning, the same question must again be addressed. When your child was sixteen, I have a feeling that you did not let them loose into the world with a brand new car, a pocket full of money, and no curfew. Likewise, when you consider how your children should inherit money from your estate, you again need to use your parenting intuition. In an article published last year, we discussed some issues to consider when planning for children. In this article, we will explore other creative options for how a child can inherit property.
First, rather than allowing a child to inherit assets outright, parents can elect to establish a trust to hold their child’s inheritance. The terms of the trust can be as broad or as restrictive as the parent deems appropriate. For some clients, they elect to hold a child’s inheritance in trust for the duration of the child’s life, while naming a corporate trustee to manage and distribute the funds to the child. Some balk at this idea, concluding that it is too restrictive. While it is true that this type of planning does not fit with every family’s goals or situation, it is important to realize the benefits of holding a child’s inheritance in trust.
Divorce is a major concern for many parents in passing property to their children. Most parents would not want their assets divided and given to a an ex-spouse. Likewise, creditor issues can also be a concern for parents who have children in higher risk professions or even children who could have unexpected creditors such as in an automobile accident or other tragedy. However, if a child is a beneficiary of a trust but does not control distributions from the trust, this arrangement can provide enhanced protection in the event of divorce or a creditor claim. This fact can be comforting to a child and to their parents.
Second, many parents prefer an option that rests between the option of complete control for the trustee and complete control for the child. Currently, our office is drafting an increased number of what we call a Beneficiary Controlled Trust. This hybrid planning allows for more increased control for the child, while still providing a level of divorce and creditor protection. With this planning, the child serves as their own trustee during the term of the trust. The child is able to direct investments and make choices concerning the allocation of the assets. However, the child cannot make any decisions concerning trust distributions. Instead, a Distribution Trustee is appointed by the child or the parent. The Distribution Trustee is an independent individual (not related or subordinate) who authorizes each trust distribution to the child. Thus, an individual should be selected who works well with the family and will be attentive to the needs of the child and any surrounding circumstances. While this may appear to be a complex situation, once set up it can work very smoothly for the family. The advantages to this particular structure often outweigh the extra trust administration.
Finally, I want to end with a word of caution. Parents need to make sure that the beneficiary designations on life insurance and retirement plans fit with their estate plan. For many individuals, a significant amount of their wealth may be held in accounts or policies that will actually pass by a beneficiary designation. When completing a beneficiary designation, the form is often very simple and the gut reaction is to put your spouse’s name as the primary beneficiary and your children as the contingent beneficiary. However, if you have named your minor children as a contingent beneficiary on a one million dollar life policy, then in the event that both you and your spouse are deceased, your minor children will inherit one million dollars outright. I am sure you are already seeing visions of an eighteen year old driving a sports car and living on a beach in Cancun. This result can be avoided by making sure that your beneficiary designations specifically state that such funds will be held in a trust for your child until a certain age or for the child’s life. If you have gone to the work of creating an amazing estate plan, you want to make sure that these critical items are not overlooked.
We are all working our way through some very challenging economic times. The goal for many people is the preservation of their current assets. This preservation mentality extends to the protection of their assets even after they have been passed to their children. The use of estate planning tools is one way to make sure that your family can enjoy the benefits of your hard work long into the future. If you have questions on these planning options, please do not hesitate to contact a member of our Estate Planning Practice Group.