Children’s Trust Checklist - 3 Important Issues
In the article posted on this web site entitled “Why You Should Have a Will”, I discuss why it is important for every adult to have a will. For parents of minor children, however, it is not just important, it is essential. A properly drafted will for a parent includes a trust for any minor or incompetent children who may inherit from the parent.
So, how does a parent go about deciding the terms of the trust? There are three primary issues to consider: the designation of Trustee, distributions during the child’s lifetime, termination of the trust and final distribution.
1. Designation of Trustee
Choose a Trustee and also a back up Trustee who will serve if your first choice is unwilling or unable to do so. This is not the person who makes decisions about the child’s family, home, personal, social or religious life. It’s the person who is charged with providing funds to or on behalf of the child during the term of the trust and eventually terminating the trust and making final disposition of the trust assets.
I recommend that you choose someone who you know to be honest, who can manage money and has some knowledge of investments. Choose someone who shares your financial values. Your Trustee should also be able to say “no”. For instance, when your child asks the Trustee for funds for a luxury car when a much less expensive vehicle will meet his transportation needs, the Trustee may have to say “no”. You can also choose to name your child as co-Trustee at some point. That may be a good choice if you anticipate leaving a very large or complicated inheritance and want the child to gradually learn to manage his own finances while the original Trustee still has ultimate control of the Trust assets.
You choose the terms of the trust and your Trustee has a duty to follow your instructions. Very often parents find it easier to set the terms of the Trust for older children than for younger ones.
Once a child enters his teenage years, you most likely have somewhat of an idea of his maturity level, how he views his trust, how he might spend money if left to his own devices, and his priorities in life. Less predictable is what younger children may need in the coming years. Perhaps a young child will develop a condition that requires extra care, and therefore a greater expenditure of funds. Or, perhaps he will become a young protégé and will need extra funds to develop his talent.
In your will, you tell your Trustee what you want to happen. Most parents ask the Trustee to provide for the health, maintenance and education of the child. Some give the Trustee complete discretion in how he will go about doing that. Other parents define how much of the trust funds he may distribute, by dollar amount or percentage, in any given year or upon the happening of specific events. Some parents feel comfortable giving the Trustee discretion in how he will preserve the assets of the trust, while others require the Trustee to make certain secure investments to preserve the capital of the Trust.
3. Termination and Final Disposition of Trust Assets
At some point, the Trust will terminate. In your will, you instruct your Trustee when that will be. You might consider termination at a certain age, such as 21, 25, or 30 years. Alternatively, you may consider termination upon the happening of specific events or a combination of the two. For instance, termination and total distribution of the trust assets to the child upon the later of a child attaining the age of 25 or graduation from a 4 year college and if there is no graduation, then at age 30.
In my practice, I try to make the process of will preparation painless for the client. For parents of minor or incapacitated children, the most difficult part, apart from choosing a guardian, is deciding upon the terms of a trust. This article presents only a few of the options available to a parent. The actual trust terms, with few exceptions, are limited only by the imagination.