Parents' roles and responsibilities may change once their children become legal adults, but that doesn't mean the desire to continue caring for their kids goes away. That's one of the reasons why it's so important for parents to make arrangements for after they pass with a solid estate plan. Not only does it protect family assets and make your last wishes known, it provides you with an opportunity to continue helping your minor child or adult child even after you're gone.
One of the more common instruments parents may choose to protect and assist their adult children is a trust. A trust is essentially a way to hold and set aside money for someone while providing specific requirements or limitations for accessing it.
Say, for example, your child just turned 18. You may want to update your will and other estate planning documents to reflect how their legal adulthood changes the plans you made for when they were still a minor. But, perhaps you don't want your 18-year-old to get a large lump sum of money before they've learned how to fully manage it. A trust allows you to leave money for your adult children, but to set stipulations for how to access it.
When you create a trust for your children, it's held by a third party, the "trustee", which allows your child, the "beneficiary", to access the funds only under the guidelines you created. While you may technically be able to ask another relative or close friend to manage the trust, most people will opt to use a financial advisor or lawyer to act as trustee of your account. Someone who can provide knowledge and experience with asset protection and trusts as well as objectivity are the advantages to this option. An expert can also help you decide which kind of trust is best for your circumstances.
If you create a revocable trust, you could continue to access it yourself or alter it as you see fit for as long as you're still alive. Some people may choose to set up a revocable trust so they can update the conditions of the trust as they deem necessary. Terms of a revocable trust may allow the funds to bypass probate courts. It's imperative, however, to have an assigned power of attorney if you're going to use a revocable trust.
If you have a revocable trust, once you pass away it reverts to an irrevocable trust. Many people choose to set up irrevocable trusts from the outset, however. Irrevocable trusts typically don't change once they've been made and if they are, it's only under certain circumstances and usually requires the beneficiaries to sign off on the changes. People may choose an irrevocable trust so all the beneficiaries are aware of the rules around their account, since it likely won't change. It also provides some tax advantages and can prevent creditors from going after the trust money.
Incentive trusts are those that impose a restriction stating your child must do something specific in order to access the money. Perhaps, as part of your estate planning, you want to make sure your children finish college or get a job before they come into their inheritance. Or, a parent can create rules for something children can't do if they want to use the funds, like restricting access to large sums of unmonitored money if kids get into legal trouble.
There are many ways you can use an "incentive" to outline the rules for the trust, typically just so long as you aren't requiring any sort of illegal activity in order to grant access to it.
Instead of limiting access to the trust based on incentives, spendthrift trusts limit specific amounts that your kids can pull from their accounts. Typically, the trustee decides when and how much the beneficiaries can get at a time. While this policy is partly to prevent people who are impulsive spenders from wasting too much at once, it's a type of irrevocable trust, so it also provides other financial protections.
There are many more types of trusts that may benefit you and your family, such as special needs trusts for children with disabilities who receive government assistance. Trusts can be set up on their own, or as testimonial trusts, which means the trust is outlined in your will and goes into effect after your death.
Whatever kind of trust you decide on, it's important to carefully follow all of your state's specific laws and codes. If you make a mistake when setting up your trust, you open it up to risks like unnecessary taxation and vulnerability to creditors. It could also impact when and how your children can actually end up accessing it. Working with an expert, like an elder law or estate planning attorney, to properly set up and then manage your trusts can offer you great peace of mind and security, so you can protect and support your kids they way you want to.