Getting smart with leaving an inheritance to young children

lettle girl with dadAn often overlooked benefit of writing a will and putting together a well thought out estate plan is that you can pass on your values to your children, even if you’re not still physically present.  The most direct way to do this is with what lawyers call the “contingent minors’ trust.”

Even a little can be a lot

If you were to die when your children are still under the age of 18, the law won’t let them have their inheritance directly, but will require it to be managed and directed by an adult until the child is 18.  Unless you say otherwise, as soon as your child blows out those candles on their 18th birthday, they will be handed the whole caboodle to do with as they please.  Even if you don’t think you have very much to leave to anyone, its likely you at least have a house with a small amount of equity, maybe a small employer provided life insurance policy, and maybe a car or two to sell.  Even a very modest estate can wind up leaving $20,000 or so to your kids, and if you don’t think an 18 year old should be left unsupervised with $20,000, then you need to set up a minor’s trust.

What is a trust?

A trust is a way of owning property that gives the right to use the money to one person and the right to manage the money to another. In the case of a contingent minor’s trust, your will would say that if your children are under the age of 18 when you die, you want their share of the inheritance to be put into a trust for their benefit, to be managed by a person that you choose.

And then things get interesting.  By creating a trust, you can direct how and when the money is used.  This is how you are able to pass on more than just things, but also your values and priorities to your children.  With the inheritance in a trust account, the age at which the child is given the money can be delayed to any age you choose, and the trustee can be directed to use the money according to your priorities.

EXAMPLE ONE

Parent writes their will when the children are very young and parent has no idea what the child will be interested in as an adult nor does the parent have any idea how responsible the child is likely to be.  The trust is written to maximize protection and also cover a broad array of possible expenses.  As an example, the trust says that the trustee can spend money to pay for higher education expenses, vocational training, or a down payment on a home.  The trustee will remain in control until the child reaches age 25, at which time 1/2 the remaining money will be distributed to the child, and the remaining amount at the age of 30.

EXAMPLE TWO

Parent revises will when the children are in their late teens.  Parent has been very successful in business and has an estate of about two million, meaning the children will receive a fairly large inheritance.  Parent is concerned that children learn how to support themselves and manage money, so the trust is written to promote those goals.  As an example, the trust says that the trustee may pay for higher education expenses as long as progress is being made toward a degree, or may pay for startup costs of a business with a well designed business plan.  The trust may not pay ordinary living expenses more than one year after graduation.  The child may become co-trustee at the age of 26 in order to learn money management skills with the guidance of the older trustee.

Your values in action

Both of these examples show the parent basically offering support to their child in the same way that they would if they were alive.  If the amount of the trust is large, it can continue to age 30, 35, or older.  Or if you believe in learning by doing, you can distribute parts of the trust directly to the child to learn or fail on their own. The trustee can be given the discretion to use the money for education and living expenses only, or to pay for travel and sightseeing or other life experiences besides formal education.  In other words, your own priorities as a parent can be built into the trust.

To learn more about using trusts in your estate plan, send us a note or give us a call.  We’re always happy to do short consults to help you decide if its time to bite the bullet and do your estate plan.

 

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