By: Randall A. Denha, J.D., LL.M.*
Some parents want to benefit the children immediately with gifts or an inheritance, while others want to attach strings and continue to maintain protection. What are the concerns that have led many parents to reconsider their children’s legacies? None are that unusual. One oft-expressed concern is that a child’s inability to handle money or a freewheeling approach to spending is likely to mean that he or she will squander an inheritance. Another is that the child will use an inheritance to support a lifestyle that his or her parents find unacceptable. When an inheritance is substantial, sometimes parents feel that handing over a large sum will sap the child’s ambition.
If your children are under age eighteen, you should have trusts for them in your estate plan, in the event you and your spouse should die before all your children reach age 18. If minors receive assets prior to reaching age eighteen, a guardian of the property must be appointed to take care of those assets for your child. A guardian of the property must be bonded (which requires annual premium payments), and the guardian must file a formal accounting with the court annually, along with a petition for approval. The guardian will need a lawyer, and perhaps an accountant, to assist with satisfying these requirements. The costs of all this are paid from your child’s funds.
Alternatively, in your estate plan, you could direct that a trust be created for each of your minor children at the death of you and your spouse. You can provide that the Trustee need not post a bond, and a Trustee is not required to file an accounting with the court every year. Creating a trust for a minor child is generally procedurally easier and less costly than leaving assets outright to a minor child and having a guardian of the property appointed.
Even if you expect your children to be over age eighteen by the time you and your spouse die, you may want to consider keeping assets in a trust for your children to “protect them from themselves” until they reach a certain age when you think they will be financially and otherwise mature. This could be age 30 or 35, or older. You may even want the trust to continue for their lives to protect the assets in the trust from future claims of your child’s creditors, including in the event of your child’s divorce. Assets that continue to be held in the trust are not subject to the claims of a child’s current or future creditors.
Trusts created for your children can be extremely flexible. The trustee can have the power to make liberal distributions to the child for any reason you would like, or for no reason (complete discretion). At a certain specific age, the child can become a co-trustee of his or her own trust, and can have the power to remove and replace the co-trustee making the distribution decisions, thus giving the child enormous control over his or her own trust. Language may be included in the trust agreement to allow a child to use trust funds for approved purposes; typically for “health, maintenance, welfare and education.” On the opposite end of the spectrum, parents may want the funds to be untouched; some states allow the insertion in the trust agreement of what is known as a “spendthrift” clause, prohibiting the child from borrowing from the trust fund.
Sometimes parents establish “incentive trusts,” which may match or double the income a child receives from his or her salary. The trust agreement also may provide that trust funds will be paid to a child only if he or she achieves a particular objective, such as obtaining a college or professional degree or holding a job for a certain number of years.
There are many reasons to create trusts, and each family’s circumstances are different. It is important to discuss these issues with your estate planning professional.
*RANDALL A. DENHA, J.D,, LL.M., principal and founder of the law firm of Denha & Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. Mr. Denha continues to be recognized as a “Super Lawyer” by Michigan Super Lawyers in the areas of Trusts and Estates Law; a “Top Lawyer” by D Business Magazine in the areas of Estate Planning and Tax Law; a Five Star Wealth Planning Professional; Michigan Top Lawyer; New York Times Top Attorney in Michigan and a Lawyer of Distinction in the areas of Estate and Tax Planning. Mr. Denha can be reached at 248-265-4100 or by email at firstname.lastname@example.org