Not all children are responsible enough to handle a large lump sum inheritance at age eighteen without some guidance. Most children would be tempted to spend it all on fast cars, designer clothes, lavish vacations, or maybe even to quit their job. It is important to educate your clients on the options available to them when it comes to leaving an inheritance to their children.
How a Continuing Trust Works
A continuing trust is a great option for clients to ensure that the money they worked so hard for lasts to provide their children with the future they envision. A continuing trust holds money for a specific period of time and does not distribute it outright. This type of trust can allow for small distributions when a child reaches certain ages, and then distribute the remainder at a specified age, or continue indefinitely. You should speak with clients to help them decide the ages and amounts that would be appropriate to disburse to their children. The specifics will largely depend on what clients want their children to use the funds for and whether any special circumstances affect their children.
- Protecting Minor Children
Continuing trusts can be particularly beneficial for situations in which a child may inherit funds or property while they are a minor. Minor children are unable to own property or inherit an amount over $15,000 in many jurisdictions. If children are set to receive more than $15,000, most states require that a conservatorship or guardianship be put in place until the child reaches the age of majority (eighteen or twenty-one depending on the state). This court process requires additional fees and court filings for the duration of the guardianship or conservatorship. And ultimately, the child would still receive a large lump sum when they turn eighteen or twenty-one (when they may still be immature). Establishing a continuing trust prevents the need for a conservatorship or court-monitored guardianship.
- Other Ways a Continuing Trust Can Help
Continuing trusts can also be beneficial in other circumstances. They can help preserve money for adult children who are financially irresponsible and tend to exercise poor judgment when it comes to spending. They can also protect children who suffer from addiction from having a lump sum given to them that could be used to fuel their addiction. Additionally, this type of trust may protect money and property from lawsuits if a child works in a high-risk occupation.
- Potential Issues with a Continuing Trust
Continuing trusts provide a lot of benefits, but they can be problematic if not drafted properly. There may be a circumstance in which a child needs a large sum of money that the client would have otherwise given, but without the proper authorization in the trust document, the trustee may be reluctant to make the distribution. Additionally, if a child requires government aid, these trusts may disqualify them if the trust does not contain specific language and provisions to enable the benefits to be preserved.
Trusts Can Be Expensive
When counseling clients on the use of continuing trusts, it is important to let them know that in most cases, managing a trust costs money. The amount that it will cost can be quite substantial depending on how long the trust exists. The most common expenses associated with continuing trusts are trustee fees and income taxes. Both should be considered by your clients when determining how long they would like the trust to remain in existence for. There can be provisions that can give the trustee authority to dissolve the trust if it becomes financially impractical to maintain or if the original purpose of the trust is no longer applicable.
Choosing the Right Trustee Is Crucial
Another important consideration of continuing trusts is that managing a trust takes time. These types of trusts are created to last for a long time and require a trustee who has the time to dedicate to the proper management of the trust. One of the more difficult decisions that clients must make is choosing who should serve as trustee. There are many considerations that go into trustee selection, and the following questions should be asked: How old is the successor trustee? Does this person have the time and capacity to manage a trust? Will selecting this person put them in a position where it could strain their relationship with the beneficiary? Some clients feel it would be better to select an entity rather than a family member; they should ask the following questions: How accessible is this institution? Will they be in business long enough? Is there a minimum trust value requirement? What fees do they charge for management?
If you are interested in learning more about continuing trusts and how you can discuss them with your clients, feel free to call us to set up a meeting.