You have worked hard all your life to build your wealth and provide for your children. You want them to have a secure and comfortable future. But what if something happens to you? What if your children face some unexpected challenges or dangers that could jeopardize their inheritance and happiness? This is not a hypothetical question. It is a reality that many of our clients face. Many of our clients ask us “Do I need a trust for my children?” to which we respond, “do you want to protect your child?” Most do, but then they ask, “Protect them from what?” The answer is from a number of potential threats that could affect their children’s well-being, whether they are minors or adults.
Disclaimer: The information provided is intended for informational purposes only and should not be construed as legal advice.
If your child is a minor, or struggles with financial literacy or addiction, they may not be able to manage their inheritance wisely on their own. Your child might need protection from their own choices or circumstances. Minors cannot own money in their own names and if you don't have a trust set up for them they will get your money when they turn 18. This could lead to reckless spending, such as buying a Ferrari instead of paying for college, or funding an addiction instead of seeking help. A trust can ensure that your child’s inheritance is used for their education, health, and well-being.
Even if your child is fiscally responsible, they are still prone to unintended creditors. Your child may face unexpected liabilities that could endanger their assets. For example, if your child causes a car accident that results in a lawsuit and damages beyond what their insurance covers, your child will become personally liable and all of their assets that they own (or inherit later) become available to that creditor. However, if your child’s inheritance is in a trust, it is not owned by them, but by the trust. This means that creditors cannot access it, as long as the trust has the proper language to provide this protection.
Your child might encounter people who want to take advantage of them or their money. These could be unscrupulous business partners, gold diggers, or even spouses who rack up debt or cheat on them. If your child suffers a brain injury or becomes incapacitated, they may be even more vulnerable to these predators. A trust can prevent your child’s money from being misused or stolen by appointing a trustee who can oversee the distribution and use of the funds.
Depending on your and your child's individual net worth, there is the potential for your child's inheritance to incur Estate taxes unnecessarily. If so, the IRS can claim up to 40% of your child’s inheritance within a year of your or their death, depending on whose estate it is taxable in. However, there are certain types of trusts that can avoid estate taxes altogether, allowing your wealth to grow and benefit your children, grandchildren, and potentially even great-grandchildren throughout their lives.
Your child may face two types of divorce issues that could affect their inheritance. The first is their own divorce. If your child gets divorced and has inherited assets in a trust, those assets will not be subject to equitable distribution as long as the trust was set up properly. The second is your divorce. If you leave your assets to your child and they die before your ex-spouse, your ex-spouse may inherit your money from your child. You can prevent this by creating a trust that specifies who will receive your money if your child dies.
You worked hard to build your wealth and provide for your children. You want them to have a secure and comfortable future. But there is no predicting what the future holds that could affect your children’s well-being and inheritance. A trust is a powerful tool that can protect your children from these threats. A trust can also help you achieve your goals and provide for your loved ones in the way you want. However, setting up a trust is not a simple task. You need the help of a qualified estate planning attorney who can advise you on the best type of trust for your situation. If you think that your children could benefit from some of the protections listed here, schedule your consultation with one of our estate planning attorneys to ensure that your children are protected during life and after your death.