Your son is 18 and your daughter is 24, and neither is financially responsible. If you die, is it wise to leave a small fortune in their hands? Since most parents think their children are financially irresponsible, the answer is “no”. But how do you bring this to pass? Let’s see how this works.
You can entrust their inheritance to another person, or trust company, and lay out conditions under which your son or daughter is to receive their inheritance. For instance, if you want money held back for your children’s education, you can do so as part of your estate plan. When he or she reaches age 27 (or whatever age you specify), the trust will terminate and what’s left will be distributed to him or her. Until then, the trustee will use (and disburse) the child’s share for education related expenses.
Obviously, there are dozens of situations where an inheritance ought to be held back: your child might be receiving government benefits, and if they received an inheritance over $2,000, they might lose their government benefit. Your child might be in the midst of the divorce case, and you are fearful that an inheritance might slip into the hands of an angry in-law.
So how do you defer your child’s inheritance?
The device that is commonly used to defer an inheritance is a trust. There are two types of trusts: one that is made as an independent agreement, traditionally known as a revocable inter vivos trust. There are lots of name variations for this type of trust: living trust, loving trust, revocable trust, trust agreement, and so forth. The other type trust is known as a testamentary trust, and this is a trust which is part of your last will and testament.
In both instances, there are always three parties involved: the person who creates the trust, the trustee, and the beneficiary. If an inter vivos trust is made, you will be the person creating the trust. As creator of the trust, you will be known as a Settlor, Trustor, grantor, or trust maker. In most instances, you will also be the trustee, and while you are alive, you’ll be the beneficiary. When you die, the office of trustee will be assumed by whomever you named in the trust. That trustee will then hold the trust property for the benefit of thebeneficiary, and the trust property will be given to the beneficiary not too long after you die.
If you prefer, you can delay the beneficiary’s inheritance, and specify the conditions under which the beneficiary is to inherit: for example, you can instruct the trustee to distribute the beneficiary’s share, when the beneficiary reaches age 30. Until then, the trustee can make discretionary distributions for the beneficiary’s support, health, maintenance and general welfare. If the beneficiary needs money, he or she can plead his or case to the trustee, and the trustee may, in its sole and absolute discretion, decide to transfer part or all of the beneficiary’s share to him or her, before he or she reaches age 30. Or, the trustee may decide not to distribute all or any part of the trust property until the beneficiary attains age 30. It’s all in the trustee’s discretion, based on the circumstances at that time.
Trusts have been around for a long time. Inter vivos trusts were (and are) commonly used to avoid probate. To make these types of trusts work, you have to transfer property from yourself to yourself as trustee. That means your home, real estate, minerals, bank accounts, brokerage accounts, and so forth will have to be retitled in yourname as trustee. If you leave certain property out of your trust, when you die, that property will go through the probate process. Thus, there are risks in creating an inter vivos trust, if the trust is not properly funded.
Testamentary trusts achieve the same objectives, but your will has to go through the probate court process. In some states, the trustee of your testamentary trust has to make an annual report to the probate court, and this increases the annual administrative expenses.
Under the WillCrafter app, you are given the option of creating a testamentary trust.
Keep in mind there are certain types of property that will not be transferred to your trust, whether it is an inter vivos trust or a testamentary trust: IRAs, annuities, other retirement plans (401k, 403B, tax sheltered annuities, etc.), and some life insurance. The beneficiary designation you make for an IRA controls who receives your IRA, and how it is to be paid out. See article, IRAs, Wills and Trusts, http://www.willcrafter.com/News/?p=11, for further explanation.
If you decide to create a trust, you must decide who will succeed you as trustee. You can name an individual, whether it be family member, friend or otherwise, and that person will then manage the property for the benefit of your trust beneficiary. Suffice to say, the person you name should be trustworthy (don’t name a former felon, or a person with questionable character). You may name co-trustees, and they will serve in a joint capacity. You may name a corporation that has trust powers (not all corporations have the power to act as a trust company; this is a privilege granted by the banking or trust commission in your respective state).
Whoever you name as successor trustee will be paid a trustee’s fee (the trustee’s fee doesn’t start until you die). The fee is usually 1% of the size of the trust. Thus, if the trust is worth $1 million, the trustee will be paid $10,000 per year, so long as the trust remains in effect. In addition, there will be other administrative expenses, such as accounting fees, income tax preparation fees and so forth.
In your trust, you can limit the fee for the successor trustee (e.g., my successor trustee shall receive a fee no more than 1% of the trust corpus, per year). Also consider limiting the exit fees for the trustee (some trust companies have a termination or exit fee of 5%).
Please understand there is no such thing as a perfect trustee, even at the corporate level. Your trust might contain some provision which permits the beneficiaries to remove the trustee, but this might undermine your objectives (a new trustee might decide that early termination of the trust is a good idea, contrary to your intentions; most corporate trustees will not terminate the trust until all of your specified conditions have been met).
To compound matters, if your trust is subject to the Uniform Trust Code (which has been adopted in about half of the states), the beneficiaries will have greater rights than you might think. The trust form in WillCrafter app curtails those rights to some extent, which means, the beneficiaries ought not to be able to trump your intended distribution pattern.
If you decide to use a corporate trustee, please visit with the local trust company office tolearn what fees will be charged. There are a few corporate trustees, such as Franklin Templeton Trust Company, which permit your trust estate to use your current, local financial advisor, but Franklin Templeton will serve as trust company, at a greatly reduced fee (most corporate trust companies expect a minimum fee of $5,000 a year; FTTC provides trust company services at approximately half that amount).
The successor trustee will give the beneficiary an accounting each year, whether the trust is an inter vivos trust or a testamentary trust.
In summary, deferring a beneficiary’s inheritance is probably a good thing. As you can tell from this article, selecting a successor trustee is not an easy task. Hopefully, this article will cause you to think about the weighty questions involved in creating a trust.