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By Editor, August 3, 2010

It is a common misconception that trusts are only for the wealthy.  If you have children, particularly minor children, a trust is one of the best ways you can provide for them if something were to happen to you…no matter the size of your estate.

Trusts are effective tools that can put you in control of who will manage the assets (including life insurance) for the benefit of your children and when your children will receive their inheritance.

Here are a few examples of how a trust can be beneficial:

Blended Families:  A bypass trust can be used to provide for children from a prior marriage.

Jeff and Jane are married and each has a child from a previous marriage.  Jane inherited the farm from her family and wants to pass it on to her daughter.  A bypass trust can be used to make sure that Jeff could still enjoy the income from and use of the farm if Jane dies first, but then upon Jeff’s death, the trustee would distribute the assets to Jane’s daughter. If the farm was left to Jane’s daughter directly in the will, it would leave Jeff in the uncomfortable position to ask if he could remain there or he could not stop her if she decided to sell the property.  Or, if Jane left the property directly to Jeff in the will, his son could ultimately end up with all or part of it.

Special Needs: A Special Needs Trust can provide for disabled children

Stephen and Sarah have a 7 year old daughter with Down syndrome.  They want to provide for her needs if they were to pass away or become disabled, but don’t want to disqualify her from receiving Social Security disability benefits.  She cannot have more than $2,000 in her own name without losing the benefits.  Using whole life insurance policies, they fund a special needs trust, where the trust is the owner of the policy.  Additionally, Sarah’s mother wants to name the grandchild as beneficiary of assets in her will, but will name the trust instead.

Asset Protection: A Spendthrift trust can provide for children who might not be able to manage money

Ryan and Rachel don’t have any children, but want to leave their assets to their only relative, a 20 year old nephew.  They create a spendthrift trust to provide asset protection for him.  As beneficiary, he receives the benefit of the trust, but cannot demand benefits from the trust.  The trustee has the power to provide for the beneficiary by paying his living and educational expenses directly to the provider and the nephew doesn’t have control over the benefits.  Provisions can be drafted so that control can change as he gets older, or can never have control if he cannot be trusted with the money.

Motivation:  An Incentive trust can provide motivation for children to make worthwhile decisions

George and Gale have three teenage children.  They worry their children will do nothing with their lives because they are anticipating a large inheritance.  They also want their children to understand the value of work and believe that earning your way through life is better than living off an inheritance.  They set up an incentive trust for each of their children with provisions to address these concerns.  The trustee is given guidance to reward each child for graduating from college then matching each child’s personally earned income in every calendar year not to exceed $100,000.  When the child reaches age 30, other incentives are specified. 

Life Insurance: A life insurance trust can ensure the money is used to benefit your children

Dean and Dianne name Dianne’s sister guardian of their two minor children if something were to happen to both of them.  Since the children are minors, they cannot be named directly as beneficiaries of their life insurance policies.  Dianne’s sister is great with children, but they are worried about her managing the life insurance proceeds.  They set up a life insurance trust and name the trust as the owner and beneficiary of the policy.  They then name the children as beneficiaries of the trust.  They name Dean’s brother, as trustee of the trust.  Trusts must be followed as they are written. If the money is ever abused, family members will have more legal leverage to get the situation corrected with a judge than if the proceeds were left out of trust. 

Trusts can be designed to fit any family’s particular situation or needs. Some trusts may provide for broad, liberal distributions over a short number of years, where others may provide strict requirements, assuring that the trust will last for the child’s lifetime and beyond.  Parents should be involved in the design of the trust to ensure the right fit.  If thoughtfully structured, you can have the peace of mind that you have provided for your children financially and how you see best fits them individually.