If your children have reached adulthood, you might assume it’s best to leave them their inheritances outright, with no restrictions. However, you want to make sure your children enjoy flexibility in accessing and using their inheritances while minimizing the impact of taxes, divorce, lawsuits, and other threats. Therefore, it might be better to leave their inheritances in a Trust.
Flexibility and Control
For an adult child who is financially savvy and responsible, a Trust can be drafted to provide a great deal of flexibility. Your child can serve as his own Trustee, and he can have the power to access the Trust property, invest and re-invest it, and distribute it to himself for purposes of health, education, maintenance, and support. He would also have the option to retain property in the Trust and do things with it, like buy a home to live in or start and operate a business.
Divorce and Child Support
Your child’s ability to retain property in the Trust is important, because as long as assets are owned by a properly-structured Trust, they are protected. For instance, in most states, assets in such a Trust would not be considered marital property and would not be subject to division if your child got divorced. This would mean your child could keep his inheritance, rather than his ex-spouse walking away with a portion – or even all – of it. Similarly, in some states, inherited Trust assets can be protected from claims for alimony or child support.
Creditors and Lawsuits
Another advantage of leaving your child’s inheritance in a Trust is that the provisions can be drafted in such a manner that the Trust will shield the property from creditors. Obviously, this would be an effective strategy if your child has trouble managing his money. However, it might be wise even if your child is financially responsible. For example, if he’s involved in a car accident and the other driver files a lawsuit against him, the assets in his Trust could be protected from any judgment awarded in the case.
It’s important to remember that state laws vary, and the degree of creditor protection might depend on the precise way in which the Trust is set up.
A Trust also can keep assets out of your child’s own taxable estate for estate tax purposes, and it can offer him a great deal of flexibility when it comes to income tax planning. This way, the inheritance you leave your child will not compound his own estate tax concerns.
If your child does not have much financial experience, has not yet reached adulthood, or otherwise needs additional oversight, a Trust can be structured to give him extra protection and guidance. You can name a third-party Trustee and place additional restrictions on your child’s access to his inheritance.
By: The American Academy of Estate Planning Attorneys