There are certain reasons that establishing an estate plan can be of the utmost importance. Having minor children or grandchildren is one of those reasons. Most parents do not have time to keep up with their own tasks, let alone consider what would happen if they died while their children were still minors, but having a comprehensive plan in place for their children is very important. You can motivate your clients by letting them know that a well thought-out and carefully drafted plan can last over eighteen years. Most parents have carefully considered what values they want to instill upon their children, but what many parents may not realize is that establishing a trust can allow them to essentially parent from beyond the grave. In addition, grandparents may want to provide a lasting gift to their grandchildren, but may be unsure of how to make a gift that truly has a lasting impact. Trusts are not a “one size fits all” planning method—in fact, there are different forms of trusts that can help your clients accomplish a variety of goals.
- Health and Education Exclusion Trust
Every parent wants to provide their child with opportunities, and grandparents also find great value in contributing to the success of their grandchildren. Education is often a major stepping stone to bigger opportunities. Many times, grandparents will tell their children that they want to leave funds for their grandchildren’s education. Your clients and their parents may be unaware of a health and education exclusion trust (HEET). A HEET could be ideal for clients who want to mitigate financial burdens on their loved ones caused by the rise in tuition and health care. These trusts allow grandparents to set aside funds to be used for their grandchildren’s and other distant descendant’s health and/or education expenses. Your clients will not directly benefit from these trusts, but they receive the ultimate peace of mind in having the trust cover their children’s educational and health care costs.
HEETs can pay for tuition costs at any education level. These trusts can be particularly beneficial for high net worth grandparents, as they can serve the dual purpose of adding a charity as a beneficiary. Additionally, grandparents can avoid generation-skipping transfer (GST) tax liability on funds transferred to the trust. Further GST (and gift tax) liability can be avoided on funds disbursed as qualified transfers. This is also an opportunity to reduce a grandparent’s taxable estate and therefore save on or avoid estate taxes. Qualified transfers are defined as funds that are transferred directly from the trust to the educational institution or medical provider.
- Incentive Trusts
How likely are children to go out of their way to do the dishes, walk the dog, clean their room, or cook dinner? How much does the likelihood increase if they are offered money for completing these tasks? Most parents would agree that incentivizing young children works like magic. How surprised would your clients be to learn that, even if they were not around, they could continue to guide and motivate their children by incentivizing them from beyond the grave?
Incentive trusts are becoming a popular choice for parents of young children that want their children to achieve certain goals in life. Incentive trusts provide parents with the flexibility to set goals and appropriate rewards through distributions once a child reaches the goal. Parents can set multiple and separate goals for each child.
There are a variety of goals that can be addressed with incentive trusts. Some of the more common goals are achieving a higher education, receiving good grades, starting a business, and maintaining a paying job. As you can imagine, these goals are best defined by a parent who knows their children’s abilities and limitations.
Asking your client to imagine not being a part of their young children’s lives can be difficult. However, incentive trusts can offer their children guidance and support if the parents are unable.
- Beneficiary-Controlled Trust
You may have clients that feel that their children are financially responsible and exercise good judgment, and they would like to avoid giving another individual control of the money they leave. Even with strong financial management skills, the money left to children is still vulnerable to creditors’ claims, divorce, lawsuits, or estate taxes. By using a beneficiary-controlled trust, these risks can be reduced while allowing the child some control over their own trust. A beneficiary-controlled trust is much like it sounds, in that a trust can be established for a beneficiary, who can also serve as the sole trustee or a co-trustee.
These trusts grant the beneficiary a considerable amount of control over their inheritance while still allowing parents to place certain restrictions on its use. When a beneficiary acts as sole trustee, they can be allowed to make distributions based on an ascertainable standard—for example, distributions for the beneficiary’s health, education, maintenance, and support (HEMS). In circumstances in which the beneficiary acts as sole trustee, under many states’ laws, most creditors cannot reach the beneficiary’s interest or compel a distribution when the trust contains the HEMS standard. However, once a distribution has been made to the beneficiary, it may be susceptible to the beneficiary’s creditors.
A beneficiary-controlled trust may be ideal for clients who want to save on administration costs, because the costs of administration are often reduced when the beneficiary serves as sole trustee.
It is important to tell your clients that while there are many ways to establish trusts, the best way for them to ascertain which structure best addresses their goals is to work with a qualified estate planning attorney.