The case for establishing trusts for your children

Jeff Witz, CFP, writes that "trusts are an excellent tool to help safeguard your preadult children in the event of your death."

Children who benefit from trust funds are frequently portrayed unfavorably in the news, in movies, and on television. Often referred to as trust fund babies, they are stereotyped as coming from extreme wealth. In reality, trusts are a powerful estate planning tool designed to safeguard your children in the event of your premature death. Trusts ensure that your assets do in fact pass to your children and further protect your children from themselves by making certain they do not overspend at an accelerated rate.

Upon your death, your assets are typically directed by a will or, in the absence of a will, the intestate laws of your primary state of residence. Assets such as retirement accounts and life insurance are disbursed according to the beneficiary designations on record. If the recipient of your assets is a minor, a conservator is assigned by the court to manage the assets until the child is of legal age to take possession. In many cases, the conservator is a family member you know and trust.

The courts supervise the conservator to ensure the money is used properly. However, even with court supervision, we still hear countless stories in the news of conservators taking advantage of their position and leaving the children with a small portion of the estate when they reach adult age. Without clear direction, it is easy to justify expenses that markedly benefit the conservator and benefit the children very little.

A trust ensures that assets are protected from abuse and used for very specific purposes. A trust is a legal entity that holds assets for a person or organization. They hold money, real property, investments, business interests, personal property, artwork, or a combination of these assets. They also serve as a primary or contingent beneficiary on retirement plans and life insurance policies.

Upon death of the grantor (the person who established the trust), assets are moved into and held by the trust. The trustee (the person assigned to oversee the trust) manages the assets and distributes them according to the instructions laid out in the trust document. The beneficiary then receives the assets for their personal use.

Many trusts have detailed language outlining what the assets can and cannot be used for. Common provisions include health, education, maintenance, and support. This wording requires that the money is disbursed only for major expenses, such as medical expenses, a college education, buying a home, starting a business, or even caring for a child. This very detailed language ensures the money isn’t misused.

Additionally, a trust helps protect children from themselves. Most grantors hope their children become financially responsible individuals. Unfortunately, that isn’t always the case, especially when they are young. A trust allows you to control when and how much money is distributed at one time. You may set up a monthly disbursement as an allowance or something more occasional such as quarterly, semiannual, or annual distributions. By spreading out the distributions, you can ensure the money is not spent too quickly and is available to support the child for a longer period.

Many trusts do eventually give the beneficiary access to larger portions of the assets. For example, it is not uncommon for a trust to give the beneficiary access to 50% of the assets at age 30, another 25% when they reach age 40, and the final 25% at age 50. After all, most grantors want the beneficiary to enjoy and benefit from the assets. At some point, they need broader access to accomplish that.

Overall, trusts are an excellent tool to help safeguard your preadult children in the event of your death. It ensures the assets go to your children and are not misused by those tasked with caring for them. They also protect your children from themselves by making sure they do not spend the money irresponsibly.

To determine whether a trust can be a useful estate planning tool for you, speak with your estate planning attorney. They will explain in greater detail how the trust functions, how it accumulates assets upon your death, and your options for directing use of the assets in the years after your death.

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