Transferring Your Legacy
7 Considerations for Distributing Trust Assets to Your Children
After you are gone, your trustee will either need to hold assets in trust for your children or distribute the assets to them. You will not be here, so you need to make sure the trust contains instructions that express your intentions. Here are some points to think about in making these important decisions.
Decide between a lump sum or phased inheritance. Consider whether you want to give your children their inheritance outright. Handing over a pile of money to them all at once may not be the best approach. Instead, consider staggering distributions to them over time such as at ages 25, 30 and 35. The wisdom behind this approach is that the kids get used to the money gradually. Also, if they receive a chunk of money and blow it, they have a second chance to redeem themselves by being more prudent with the funds.
Consider a lifetime trust. If you think your children will spend the assets unwisely, you should consider holding the assets in a lifetime trust. The trustee will be able to make distributions in the trustee’s discretion but there are no required distributions, and the child cannot demand that monies be distributed. This is also a good idea if a child has a medical diagnosis that may impact his or her judgment or if the child is showing signs of addictive behavior such as excessive drugs, gambling or alcohol. If the child can be easily influenced by a spouse or acquaintance, this is also a good reason to hold the funds back in trust.
Protecting your child’s inheritance from a future divorce. A lifetime trust can also protect the inheritance if the child later divorces. Some parents will even require that a child have a prenuptial agreement in place in order to receive distributions from the trust. This approach is not without risk. The child could certainly tear up the prenuptial agreement after receiving the distribution or bring a lawsuit against the trustee if the child feels he is being treated unfairly.
The “middle” way. If you want to give your children some cash outright with no strings attached, consider distributing a portion of their inheritance and holding back some in trust for their lives. For example, the trust can distribute 50% and holdback 50%. Look at the holdback as a protection. It can provide monies for the child’s retirement, ensure that your grandchildren receive an education that is paid for by the trust, and leave some monies for the grandchildren to inherit. Another option is to provide an income stream to your child with the principal going to the child’s descendants. I have heard too many stories about adult children who receive large inheritances and then spend it all leaving nothing for the grandchildren. Ensuring that future generations enjoy the fruits of your labor is a nice legacy to leave.
Add a mental health/substance abuse provision. If you have any concerns about a child’s current or future mental health issues or problems with substance abuse, look at including a provision authorizing the trustee to hold back or delay any distribution if the trustee believes that the child has an addiction, is susceptible to influence by bad actors or is in a cult or sect.
Link milestone requirements to the inheritance. You can add provisions to your trust that your child must be gainfully employed or raising a family in order to receive distributions. It is also not uncommon to require your child reach certain milestones or life events such as graduating from college or a graduate program, buying a home, starting a business, etc. in order to receive distributions.
Give your child a seat at the table. One of the best ways to help your adult child learn how to responsibly manage money is to have her serve as a co-trustee and to spend some time before you are gone educating her regarding the ins-and-outs of how the trust is managed and administered.
There are so many options in creating your trust. You want to provide enough instructions for the trustees to carry out your intentions but not such detailed guidance that the instructions become overly burdensome or likely to lead to litigation.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.
Get in touch with The Private Bank
Build a financial partnership to last a lifetime.