How Trusts Protect Your Adult Children
A parent’s roles and responsibilities may change when their children become adults, but that does not mean the desire to care for their kids goes away. This is one of the reasons why parents must arrange for their passing through a solid estate plan. Not only does it protect family assets and make your wishes known, but it also allows you to continue helping your minor child or adult child even after you’re gone.
Trusts are vital estate planning documents that can:
- Provide benefits while you are still alive
- Help you plan for distributions of your property
- Protect your beneficiaries
Older adults with complex finances should seek the advice of an older adult law attorney in their area. An attorney helps create detailed trusts that can protect loved ones when the time comes. In addition, low-cost do-it-yourself (D.I.Y.) estate planning is possible in some simple cases and can be found on our companion site, FindLaw.com.
One of the more common instruments parents choose to protect their adult children is a trust. A trust is a way to hold and set aside money for someone while providing specific requirements or limitations for accessing the assets.
For example, you should update your will and other estate planning documents when your children turn 18 to reflect how their legal adulthood changes the estate plans that were made when they were still a minor. However, suppose you don’t want your 18-year-old to get a large lump sum of money before they’ve learned to be financially independent. In that case, a trust would allow you to leave money for your adult children and set restrictions on how they access it.
A trust is any property and assets held by a “trustee” for the use and benefit of the “beneficiaries.”
The trustee holds and distributes the trust assets according to the terms set out in the trust. A trust could distribute assets over time or when certain conditions are met, such as reaching a certain age.
One of the benefits of a trust is that it may allow the assets to bypass probate courts. Probate is the court process of administering and distributing assets when someone dies. Probate can take months or longer and involves court administration fees. Avoiding probate with a trust can help save time and money to distribute your assets after you pass away.
When designating a trustee, you could ask a family member or close friend to manage the trust. However, many people will instead have a financial advisor or lawyer act as trustee of the account. You want a trustee who can provide knowledge and experience with asset protection and trusts and be objective. A trust law firm can also help you decide which kind of trust is best for your circumstances.
Revocable trusts, also known as living trusts, provide for the distribution of a trust’s assets after death. If you create a revocable living trust, you can continue to access the assets as you see fit for as long as you’re alive. Some people choose to set up a revocable trust so they can update the conditions of the trust whenever necessary.
As the grantor of a trust, you can put whatever assets you want into the trust, including your home, real estate, bank accounts, and vehicles. You can still use the property for your own use until you pass away, but the trust provides for distribution upon death.
Irrevocable trusts typically don’t change once made, and changes may require the beneficiaries to approve. A revocable trust reverts to an irrevocable trust. Some people choose to set up irrevocable trusts from the outset, but they will not have the same access to the assets while alive.
People may choose an irrevocable trust so all the beneficiaries know the rules around their account since it likely won’t change. It also provides some estate tax advantages and can prevent creditors from going after the trust money.
Incentive trusts are those that impose restrictions on getting access to funds. For your adult children, an incentive trust could require that your child do something specific in order to access the money. There are many ways you can use an “incentive” to outline the rules for the trust. Generally, you can’t require illegal activity to grant access to the child’s inheritance.
Perhaps you want to ensure 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 the child has substance abuse problems.
Instead of limiting access to the trust funds based on incentives, a spendthrift trust limits the beneficiary’s access to the trust property. The funds can be released in increments, such as monthly distributions. The trustee can also decide when and how much the beneficiaries can get per increment. This can protect the money from creditors and prevent people from spending too much at once.
There are many more types of trusts that may benefit you and your family, such as special needs trusts for children with disabilities. A special needs trust can help a disabled child who receives government benefits like Medicaid. The trust can protect the child’s assets while maintaining eligibility for benefits. A special needs trust can also provide for needs that are not covered by benefits.
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.
Whenever there is a significant life change, like the birth of a child, marriage or divorce, or death in the family, it may change your estate planning wishes. You may also want to revisit your trust documents every few years to ensure they reflect how you want to protect your adult children in the event of your death.
Some parents may be unhappy about who their child decides to marry. You may not want your adult child to lose all their inheritance if the child’s spouse spends all the money or takes it in a divorce. A trust can be used to provide for assets in the name of the adult child only, to keep the assets from being combined with joint marital accounts.
Whatever kind of trust you decide on, you must carefully follow 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 the funds.
You can work with someone experienced, like an older adult law or estate planning attorney, to ensure your estate documents are correctly set up and managed. A strong estate plan can give you great peace of mind and security to protect and support your kids.