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Inheritance Trusts Protect Children and Give You Control

Inheritance trusts are used to maintain some level of control in how assets of any size are passed on to and used by another person (referred to as a trust “beneficiary”). Leaving an inheritance to a beneficiary in a trust, as supported by the article from Times Herald-Record titled “Leaving inheritances to trusts puts you in control,” can protect money or property from being squandered through extravagant expenditures or lost due to creditor problems or failed marriages.


For many parents, the inheritance equation is simple. They leave their estate to their children, and, if a child predeceases the parent, the assets go to the deceased child’s children (i.e. the grandchildren), if any.


The details of those gifts to children are also typically pretty simple. The child will inherit money or other property “outright” if they are of age (18 or perhaps slightly older depending on the terms of the trust document). While simple, these trusts provide no protection from things like overspending by the child, divorces, lawsuits, etc.


An alternative is to create inheritance trusts for children. The inheritance trust is a great way for parents, who are concerned about the impact of their wealth on their children, to maintain some degree of control. The child may use the money in their inheritance trust as needed for their health, education, maintenance and support, and the trustee (typically someone older and more responsible) will determine whether any of the child’s purported needs are appropriate uses of the trust’s funds. The terms of the trust can be very specific as to what appropriate uses of trust funds are (i.e. to attend a four-year college or vocational school, or for a down payment on a house, for instance). In the absence of specificity in the trust document, the trustee must use his or her discretion.


In addition to helping against overspending or mismanagement of assets, the inheritance trust also protects the assets from divorces, lawsuits and creditors. That is a huge benefit that can come in really handy down the line if misfortune strikes. Because the trustee has discretion as to whether or not to provide money to the child at any given time, the money can be kept out of the child’s hands until the situation is resolved (perhaps making needed payments on behalf of the child in the meantime). In addition, including a provision referred to as a spendthrift clause (making the trust a “spendthrift trust”) provides that creditors cannot reach the trust property for any reason as long as it remains in the trust.


The length of the inheritance trust can vary. One strategy is a graduated payment plan. A certain amount of money is given to the child at certain ages, such as 1/3 when they reach age 30, 1/3 at age 35 and 1/3 at age at age 40. Until distributions are made at the stated ages, the trustee may provide money to the child or for the child’s benefit as needed.


Another strategy with the inheritance trust that is gaining increasing popularity with our clients is to leave the property in trust for the lifetime of the child, and provide that the child can become a co-trustee or sole trustee of the trust at a certain age (30 or 35 for instance). That gives the child some control and responsibility, but also protects the assets that remain in the trust throughout the child’s lifetime. In other words, the child can consume assets as needed, but the balance of the property will be safe from divorces, lawsuits and the like. The terms of the trust can provide the child with a power to appoint the property remaining in the trust at his or her death to another person or persons through their own will or other written instrument (referred to as a “power of appointment”), and can also specify who will receive the property  (often the grandchildren or surviving children) if the child fails to exercise that power.


Of course, there are many other strategies to consider, particularly if a child has special needs and is receiving government benefits, for instance. That said, the above provides you with an idea of some of the more popular options for a parent or other person who is simply looking to safeguard against common concerns regarding inherited property they leave behind for a child or loved one.  A qualified estate planning attorney will be able to review your family’s situation and help determine which trust strategy will be best for your family.


Reference: Times Herald-Record (Feb. 16, 2019) “Leaving inheritances to trusts puts you in control”


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