As a parent, it may be one of your many goals to leave behind an inheritance for your beloved children. The good news is that there are many ways to do so while still protecting your legacy and the well-being of your children.
It’s important to note that selecting the right distribution requires the oversight of an experienced estate planning attorney. Before you move forward, consider reaching out to an attorney who can help you take the right next steps.
Method #1: An Outright Gift After Death
This is perhaps the most common method parents choose. It involves making an outright gift to their children (over the age of majority) using a will. This method is typically best used when adult children are financially responsible or when the gift is a small amount of property or money.
However, in many cases, leaving a gift isn’t the best choice. For example, if your children are minors, they won’t be able to legally take control of the inheritance. Instead, there will need to be a special account put into place to hold the property or you will need to assign a custodian.
If your children are young adults, they may not be mature enough to make sound financial decisions when it comes to their inheritance. Or, they may undergo life-altering circumstances such as divorce in which their inheritance may go to a divorcing spouse.
To best protect your children and your legacy, it’s typically best to place your property into a trust.
Method #2: Child as Trustee
Another common method is to place a child in the role of trustee over a trust that’s established at your passing. If your child is also listed as the beneficiary, it is up to the trust terms to determine how they can make distributions to themselves.
Similar to the gift method, this isn’t best for children who struggle with making sound financial decisions. And unfortunately, due to the amount of control your children will have over the property, creditors can also access the assets you leave behind.
Another common issue with the “child as trustee” method is the potential for conflict. For example, if multiple children are acting as co-trustees, distribution can quickly become a challenge.
These challenges can be eliminated by selecting a beneficiary-controlled trust, often called a HEMS (health, education, maintenance and support) trust. In this trust, the child is still the trustee and has a certain level of control but the terms of the trust state that funds can only be distributed for specific purposes, including health and education. This gives the assets greater protection from creditors and divorced spouses, although the protection is not complete. For example, a bank could come after trust funds set aside for education if the beneficiary has defaulted on a private student loan.
Method #3: Specific Age Distribution
Using this method, parents decide when to distribute property held by a trust based on a child’s age. For example, you may choose to start distributing a fourth of the property once your children reach the age of 25, another fourth at 35, and the balance at 45.
This is the method chosen often by parents who wish to wait until their children are financially mature before distributing large amounts of money or property. However, this method doesn’t protect the property from creditors. Once a distribution is made, it immediately becomes vulnerable. This is the most common distribution method chosen by families, despite not offering significant protections.
Method #4: Incentive Trust
Are there certain goals you want your children to achieve before receiving their inheritance? The incentive trust enables you to authorize distributions based on the achievement of specific goals such as starting a career or attending college.
There are specific downsides to this type of trust. This method often conjures up feelings of anger within your children, especially if they feel the trust conditions are unrealistic.
For example, if your child suffers hardships that prevent them from graduating college in a timely manner, this may also prevent them from receiving their inheritance. This is true even if the hardships are the result of circumstances out of their control.
This type of trust can also be difficult to manage for your trustee. The process of gathering proof to ensure trust conditions have been met can often be lengthy and expensive.
One way to marry your intent with the realities of your child’s life may be to distribute assets “upon graduation from college or at age 25, whichever comes first.”
Method #5: Distribution Based on Purpose
Similar to HEMS trusts, this method allows distributions to be made to beneficiaries for specific purposes such as starting a business, opening a professional practice, or buying a home. Like the other trusts discussed above, this trust protects your property held in trust from being used by creditors or in lawsuits.
Method #6: Discretionary Trust
This method enables your trustee to have full control over distributions to your beneficiaries, and it does not require distributions to be made. The trustee will determine which children receive what assets and when. A beneficiary cannot be the trustee of this type of trust for it to work. It requires an independent trustee.
Establishing a separate discretionary trust for each child will eliminate conflict between your children due to the potential for unequal distribution. Your children may dislike the uncertain nature of the distributions and worry about financial hardship and planning difficulties since money can not be expected at specific times or on certain occasions. However, for many parents that is the precise goal of such a trust – to provide your children with a financial legacy while encouraging them to achieve independent financial stability.
Parents who choose this type of trust must have full confidence in their trustee to do what’s best for their children.
We Can Help You Choose the Right Method for You and Your Family
The truth is, there isn’t a one-size-fits-all approach to estate planning. To ensure you leave behind a legacy for your children, consider reaching out to an experienced estate planning attorney.
Janet L. Brewer can help you make sense of the confusing legal jargon associated with estate planning. Reach out to our firm by calling 650-325-8276 or send us a message.
