It is almost automatic for families with minor children to implement trusts for the children within their estate plan. The logic is simple. If one spouse dies, the family’s collective estate is typically left in the care of the surviving spouse, who will continue to raise the children and make spending decisions on their behalf. However, if both spouses die, and the children are then raised by guardians, conventional wisdom says that the parents must leave the children’s shares of the estate in trust. Otherwise, the children would receive their shares of the estate upon reaching the age of majority, leaving the strong possibility that their shares will be spent quickly and unwisely. Therefore, minors’ trusts are strongly recommended. The basic idea is that your assets will be managed by a trustee, who will be responsible for ensuring that the assets are appropriately invested and spent for your children’s benefit. Here are a few of the primary factors families should consider:
1. Who are the trustees? This may be the most significant factor. If choosing individual trustees (as opposed to corporate trustees, which I will discuss in a future post), you should consider individuals who either share your values or understand and respect your values when it comes to spending priorities. For example, if you value private education for your children, your chosen trustees should either value private education as well or at least respect your values on this point. Your chosen trustees should also have a solid rapport with the children and the children’s guardians. The circumstances will be difficult enough without inviting conflict. Ideally, you should also choose trustees who, as the children mature, will engage the children in reaching reasonable decisions on spending questions, as these questions will represent significant learning opportunities. Note that the trustees and guardians may be the same individuals, but there are also reasons against choosing this dynamic.
2. What are Acceptable Trust Expenditures? Although most trust provisions are very broad, you do have an opportunity within your estate planning documents to emphasize certain acceptable expenditures as a reflection of your values, or to clarify to your trustees what may be permissible. For instance, most trust provisions state that education costs are acceptable trust expenditures. But you may be more explicit than that – if private elementary education is important to you, you can emphasize that in your trust provisions. If your guardian most likely will require supplemental funds to raise your children, your trust provisions should reflect the trustee’s ability to provide such a supplement. Giving your trustees flexibility is important, but you should also be clear about certain priorities when necessary.
3. When and How Should the Trust End? Keep in mind that one of the key reasons for implementing trusts for minors is to allow your children to “grow into” their inheritances. That is, this structure allows your trustees to manage the trust funds until such time as the children may be able to responsibly manage their own assets. With very young children, this really becomes a guessing game, as you don’t yet know how your five-year old will handle significant sums of money in the future. One option allows your children to have the ability to withdraw certain percentages of the trust at certain ages – for example, one third at age 25, one third at age 30, and the remainder at age 35. Your children may elect to leave the funds in trust, or you may, in fact, keep the child’s funds in trust for the remainder of his or her life.
This list of questions and possible answers is by no means exhaustive, and you can only come to the right decisions through in-depth discussions with your attorneys and advisors. Hopefully, though, these discussion points can start you in the direction toward good decisions for your family’s future.