Many years ago the prevailing estate planning philosophy was that keeping assets in trust for a child’s lifetime was administering from the grave. Today, more people view it as providing security for children and grandchildren in a more unsettled world.
Sometimes, you may want to deny your child complete access to your funds. So let’s examine three reasons to keep assets in trust for your child.
1. Insulates assets from creditor claims and divorce proceedings
Money held in trusts is off-limits to the beneficiary’s creditors and from a divorcing spouse during divorce proceedings. For example, if your child starts a business and he or she guarantees a loan and the business fails, the bank can’t attach the assets in his or her trust. If your child gets divorced, the divorce court isn’t permitted to give his or her spouse trust property.
If a child received all trust assets on reaching a specified age and kept the assets solely in his or her name, almost all states would not consider this property marital property. Thus, the spouse would not be entitled to any of the trust assets after a divorce. But if your child puts the money in joint tenancy with his or her spouse, the assets would be considered marital property in most states, and the divorce court could give the spouse a percentage of the assets.
2. Keeps property in the family
If your child has the right to withdraw his or her entire trust after reaching a specified age, he or she is free to dispose of those assets any way he or she desires. If your child decides to put the money in joint tenancy with his or her spouse and predeceases the spouse, the assets will go to the spouse as a surviving joint tenant.
This should not be problematic because the spouse will, in all likelihood, take care of any children (your grandchildren) she has with your deceased child. But if the spouse remarries, puts all the trust’s property in joint tenancy with a new spouse, and then predeceases that spouse, all the assets would pass to the new spouse and your grandchildren would receive nothing.
Keeping the funds in trust for your child ensures that, on his or her death, the trust’s assets will either be distributed to or continued to be held in trust for your grandchildren rather than being bequeathed to your child’s spouse.
3. Provides for a trustee to control asset distribution
By keeping your assets in trust you may name a trustee to invest the money and control distribution of trust income and principal to your child. If you’re concerned that your child may not be capable of correctly investing the trust’s assets, you may choose an individual as a trustee who either knows how to invest or would hire someone who does. You also may hire a bank or a trust company to act as trustee.
If you believe your child may spend the money irresponsibly, you can authorize the trustee to make asset distributions according to the trust’s terms. You also may direct the trustee to distribute property only when your child reaches specific incentives, such as graduating from high school or earning a college degree.
Finally, you may name your child as a co-trustee when he or she reaches a specific age. As a co-trustee, your child can learn the ins and outs of investing assets from the trust’s trustee.
Many more benefits
These are but three reasons to consider leaving assets in trust for your child. Many more benefits may exist depending on your situation. To learn more about these versatile estate planning vehicles, please give us a call.