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 that serve the purpose of
protecting your children. 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 that can help
protect your children and preserve your assets.
What is a Trust and how are they 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 of the Trust 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 to the
trustee on appropriate uses of Trust assets.
Trust provisions can be as
accommodative or as restrictive as the grantor prefers and the situation
warrants. 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.
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.
About Beacon Financial
Strategies
Beacon Financial Strategies is an independent,
fee-only financial planning, tax and investment advisory firm located in
Raleigh, NC. Beacon works with
clients on a consultative and objective basis to help them achieve their
personal financial goals. Beacon professionals specialize in the following
areas of financial planning: retirement feasibility planning, estate planning
and coordination, investment management, tax minimization strategies, and other
wealth management services.