Back to School: Time to Protect Your Child’s Future

Personal Guidance from beyond the Grave

Life can get hectic for parents when the school year starts. Parents often juggle many different responsibilities, which increase with the number of children they have and activities the children participate in. Most parents feel like they need to be in five places at once!

As a parent, you have likely pictured what your child’s future will look like, but how many times have you considered what would happen if you were unable to be a part of their future? This is a sad thought to consider for everyone, however, taking steps now to put a plan in place can offer you peace of mind so that if the unexpected happens, your child will receive the benefit of your hard work and planning.

What goals do you have for your child’s future?

To develop a comprehensive plan for your child’s future, it is helpful to consider what goals you hope they will achieve, what experiences you feel are important for them to have, and what values you would like to instill in them. There are planning methods that can support your child in achieving a higher education, learning a valuable trade through trade school, or even becoming an entrepreneur and starting their own business. You can also opt to leave funds or incentives to encourage them to spend some time volunteering for important causes. You should also think about whether you want to provide your child with the ability to travel, whether it is to see the world or maintain relationships with extended family members.

Put goals into action with an estate plan.

There is no substitute for the guidance and support you can provide for your child. However, you may be surprised to learn that there are ways to guide them, even in your absence. This can involve planning methods that incentivize your child to accomplish certain tasks during their lives. You can emphasize the importance of values such as working hard by encouraging them to maintain a job and potentially matching a portion of their salary. You can provide them with funds to allow them to pursue philanthropic efforts. Education is often a goal many have for their children, which could include learning a trade or obtaining a college degree. Fortunately, there are many ways to set aside funds for your child to use for education.

In addition, just as you are prioritizing your family by creating an estate plan, you can also assist your child in prioritizing their future families and relieving some of their financial pressures. This can be done by setting aside funds for your child to use for family vacations, to pay for their children’s education, or to purchase their first home.

We know this type of planning may seem daunting, but you can accomplish developing a comprehensive plan for your child’s future by contacting a qualified estate planning professional to start the planning process. Once you finish, you will have answered many important questions about the future and will feel prepared. You may wonder why you did not start the process earlier. If you need to create or review your estate plan to provide for your child, give us a call.

Four Things to Consider When Using a Continuing Trust

Not all children are responsible enough to handle a large lump sum inheritance at age eighteen without some guidance. Most children would be tempted to spend it all on fast cars, designer clothes, lavish vacations, or maybe even to quit their job. It is important to educate yourself on the options available in the event you die prior to your children reaching the age of majority.

  1. How a Continuing Trust Works

A continuing trust is a great option to ensure that the money you worked so hard for lasts to provide your children with the future you envision. A continuing trust holds money for a specific period of time and does not distribute it outright. This type of trust can allow for small distributions when a child reaches certain ages, and then distribute the remainder at a specified age, or continue indefinitely. You decide the appropriate ages and amounts for disbursements to your children. The specifics will largely depend on what you hope your children will utilize the funds for and whether you need to plan for special circumstances that affect your children.

  • Protecting Minor Children

Continuing trusts can be particularly beneficial for situations in which a child may inherit funds or property while they are a minor. Minor children are unable to own property or inherit an amount over $15,000 in many jurisdictions. If children are set to receive more than $15,000, most states require that a conservatorship or guardianship be put in place until the child reaches the age of majority (eighteen or twenty-one depending on the state). This court process requires additional fees and court filings for the duration of the guardianship or conservatorship. And ultimately, the child would still receive a large lump sum when they turn eighteen or twenty-one (when they may still be immature). Establishing a continuing trust prevents the need for a conservatorship or court-monitored guardianship.

  • Other Ways a Continuing Trust Can Help

Continuing trusts can also be beneficial in other circumstances. They can help preserve money for children who are financially irresponsible and tend to exercise poor judgment when it comes to spending. They can also protect children who suffer from addiction from having a lump sum given to them that could be used to fuel their addiction. In addition, this type of trust may protect money and property from lawsuits if a child works in a high-risk occupation.

  • Potential Issues with a Continuing Trust

Continuing trusts provide a lot of benefits, but they can be problematic if not properly drafted. There may be a circumstance in which a child may need a large sum of money and the trust does not give the trustee the ability to distribute money for that need. Additionally, if a child requires government aid, this type of trust may disqualify the child if it does not contain specific language to preserve the benefits.

While we have already discussed several of the benefits of establishing a continuing trust, there are other important considerations when deciding if a continuing trust is the right fit. In most cases, managing a trust costs money. The amount that it will cost can be quite substantial depending on how long the trust exists (and continuing trusts typically last a long time). The most common expenses associated with continuing trusts are trustee fees and income taxes. Both should be considered when determining how long you would like the trust to exist. There can be provisions that can give the trustee authority to dissolve the trust if it becomes financially impractical to maintain or if the original purpose is the trust is no longer applicable.

Another important consideration of continuing trusts is that managing a trust takes time. These types of trusts are created to last for a long time and require a trustee who has the time to dedicate to the proper management of the trust. One of the more difficult decisions you will need to make is choosing who should serve as trustee. There are many considerations that go into trustee selection, and the following questions should be asked: How old is the successor trustee? Do they have the time and capacity to manage a trust? Will selecting this person put them in a position where it could strain their relationship with the beneficiary? You may feel it would be better to select an entity rather than a family member; if so, you should ask the following questions: How accessible is this institution? Will they be in business long enough? Is there a minimum trust value requirement? What fees do they charge for management?

There are a lot of considerations in determining whether a continuing trust is the right fit for your family. Contact a qualified estate planning professional who can ask you the right questions to make a proper determination of whether this form of trust is appropriate or if there may be a better option for your circumstances.

Three Types of Trusts to Plan for Minor Children and Grandchildren

There are certain reasons that establishing an estate plan can be of the utmost importance. Having minor children or grandchildren is one of those reasons. Most parents do not have time to keep up with their own tasks, let alone consider what would happen if they died while their children were still minors, but having a comprehensive plan in place for their children is very important. It can be motivating to know that a well thought-out and carefully drafted plan can last over eighteen years. Most parents have carefully considered what values they want to instill upon their children, but you may not realize that establishing a trust can allow you to essentially parent from beyond the grave. In addition, grandparents may want to provide a lasting gift to their grandchildren but may be unsure of how to make a gift that truly has a lasting impact. Trusts are not a “one size fits all” planning method—in fact, there are different forms of trusts that can help your clients accomplish a variety of goals.

  1. Health and Education Exclusion Trust

Every parent wants to provide their child with opportunities, and grandparents also find great value in contributing to the success of their grandchildren. Education is often a major stepping stone to bigger opportunities. Many times, grandparents will want to leave funds for their grandchildren’s education. You and your parents may be unaware of a health and education exclusion trust (HEET). These trusts allow grandparents to set aside funds to be used for their grandchildren’s and other distant descendant’s health and/or education expenses, providing you with the ultimate peace of mind in having the trust cover your children’s educational and healthcare costs.

HEETs can pay for tuition costs at any education level. These trusts can be particularly beneficial for high net worth grandparents, as they can serve the dual purpose of adding a charity as a beneficiary. Additionally, grandparents can avoid generation-skipping transfer (GST) tax liability on funds transferred to the trust. Further GST tax (and gift tax) liability can be avoided on funds disbursed as qualified transfers. Qualified transfers are defined as funds that are transferred directly from the trust to the educational institution or medical provider.

  • Incentive Trusts

How likely are children to do the dishes, walk the dog, clean their room, or offer to cook dinner? How much does the likelihood increase when they are offered money to complete these tasks? Most parents would agree that incentivizing young children works like magic. How surprised would you be to learn that even if you are not around, you can continue to guide and motivate your children by incentivizing them from beyond the grave?

Incentive trusts are becoming a popular choice for parents of young children that want their children to achieve certain goals in life. Incentive trusts provide parents with the flexibility to set goals and appropriate rewards through distributions once a child reaches the goal. Parents can set multiple and separate goals for each child.

There are a variety of goals that can be addressed with incentive trusts. Some of the more common goals are achieving a higher education, receiving good grades, starting a business, and maintaining a paying job. As you can imagine, these goals are best defined by you, who knows your children’s abilities and limitations.

Imagining not being a part of your young children’s lives can be difficult. However, incentive trusts can offer your children guidance and support if you are unable.

  • Beneficiary-Controlled Trust

You may feel that your children are financially responsible and exercise good judgment, and you may want to avoid giving another individual control of the money you leave them. Even with strong financial management skills, the money left to children is still vulnerable to creditors’ claims, divorce, lawsuits, or estate taxes. By using a beneficiary-controlled trust, the risks can be reduced while allowing your children some control over their own trusts. A beneficiary-controlled trust is much like it sounds, in that a trust can be established for a beneficiary, who can also serve as the sole trustee or a co-trustee.

These trusts grant the beneficiary a considerable amount of control over their inheritance while still allowing you to place certain restrictions on its use. When a beneficiary acts as sole trustee, they can be allowed to make distributions based on an ascertainable standard—for example, distributions for the beneficiary’s health, education, maintenance, and support (HEMS). In circumstances in which the beneficiary acts as sole trustee, under many states’ laws, most creditors cannot reach the beneficiary’s interest or compel a distribution when the trust contains the HEMS standard. However, once a distribution has been made to the beneficiary, it may be susceptible to the beneficiary’s creditors.

You can save money on the cost of trust administration when your beneficiary serves as the sole trustee. However, there may be benefits to appointing a co-trustee to serve and giving your beneficiary the ability to remove and replace the co-trustee, if necessary.

As you can see, trusts are not “one size fits all.” The type of trust you choose can address your specific concerns. It is best to work with a qualified estate planning professional who can analyze your situation and fully discuss your goals in establishing a trust, and ultimately provide you with a comprehensive plan that protects the future of both you and your family.