Most parents take certain steps to protect their children in the event of their premature death.  Drafting a will or other estate documents, designating a guardian, obtaining life insurance and naming appropriate beneficiary designations on IRAs and 401k plans are all important components of an effective estate plan. However, most parents should take additional measures to provide guidance on how their financial assets are managed for their children’s benefit. In the event of your death, consider the following:

• Would you like to avoid the potential financial pitfall of your children inheriting a sizable sum of money at an early age?

• Would you like to have some control over who manages your children’s financial assets?

• Would you like to provide guidance on the types of expenses your assets should be used to cover?

• At your death, would you like to gradually give your children access to their inheritance based on their age or other benchmarks (like graduating from college)?

If you answered yes to any of these questions, you should consider incorporating trust provisions into your estate plan.  A properly drafted trust can help protect your children and preserve your assets.

What is a trust and how is it funded?

In a general sense, a Trust is simply a document, or a provision in a document, that outlines how certain assets are to be managed and ultimately distributed.  Trusts can be funded in a variety of methods including titling property in the name of the trust, naming a trust as the beneficiary of life insurance policies or retirement plans or they can be funded through the probate process by provisions in a will.

What are common components of trusts that are specifically designed for the benefit of children whose parents are deceased?

• The trust names a trustee - Through the drafting of a trust, the grantor (in this case the parent), identifies a trustee.  The trustee has a fiduciary obligation to manage and disburse trust assets per the terms of the trust.  Oftentimes the trustee is also the child’s designated guardian. However, this is not always the case as sometimes the guardian may not be financially savvy enough to handle all of the financial requirements of being the trustee.

• The trust gives guidance on the appropriate uses of trust assets - Trust provisions can be as accommodating or as restrictive as the grantor prefers.  Some trusts specify that assets be used as the trustee sees fit, while others earmark trust assets only for health, maintenance and education of the beneficiaries (in this case the children).

• The trust spells-out a final distribution arrangement and ultimate trust termination - Trusts generally set forth a timeline as to when children would ultimately receive their inheritance.  Most parents would like to ensure that their children are mature enough to handle money effectively before they receive a sizable sum of money.  Therefore, trust provisions may specify that children would receive laddered distributions.  For example, their child would receive 1/3 of the trust at age 25, 1/3 at age 30 and the final 1/3 at age 35.

Is an attorney needed to draft trust documents?

Estate planning is a complex and dynamic component of the financial planning process.  There are many financial, legal and practical matters involved that we believe warrant the use of a qualified estate planning attorney. Especially with the enactment of the Secure Act, now more than ever, clients should review their trust documents with their estate planning attorney.

Beacon Financial Strategies has an extensive list of qualified attorneys and other professionals that we depend on to help our clients.  If you would like to discuss your situation in more detail, please feel free to contact our office to schedule a meeting.