Parents with young children

If you have young children, want to assure a good education for them, and will have enough assets to do so after death (including life insurance proceeds), you should consider including trust provisions in your will or creating a living trust for their benefit. The trustee manages the property in the trust for the benefit of your children during their lifetime or until they reach the ages that you designate. Then any remaining property in the trust may be divided among the children.

This type of arrangement has an obvious advantage over an inflexible division of property among children of different ages without regard to their respective ages or needs. Trusts are more flexible than giving outright gifts to minors in your will (which requires a guardian) or a gift under the Uniform Transfer to Minors Act, which requires appointment of a custodian and, depending on state law, often transfers of property to the child at age 18 or 21.

Issues to consider when setting up a trust for the benefit of your children:

• One trust or many? Most people will set up one trust that all the children can draw on, until they’ve completed their educations (or reached an age by which they should have done so). Then the remaining principal is divided among them equally. This permits the trustee greater flexibility to distribute (“sprinkle”) the money unequally according to need; for example, one child may choose to pursue an advanced degree at an expensive private university, while another may drop out of community college after a semester. Obviously, they will have different educational expenses.

  Such an arrangement can cause friction in some families. However, your lawyer can help you craft a trust that can provide rough equality of treatment for family members whose individual circumstances differ.

  There are two philosophies about what to do if there’s a disparity in ages among the children. One theory is that the older children have already received the benefit of the parents’ spending before they died, so the trustee should have authority to make unequal distributions in favor of the younger children to compensate. The other camp, by contrast, thinks it better to establish separate trusts, so that the older children don’t have to wait until they’re well into adulthood before the trust assets are distributed (which usually happens when the youngest child reaches majority age). You’ll have to decide which course is best for your family’s circumstances.

  Generally speaking, the less money you have to distribute, the more likely you would put it all in one trust. Since there is a limited amount of money, you want to pool it to be sure that it goes for the greatest need. On the other hand, if equality is your primary consideration and there’s plenty of money available to take care of each child’s likely needs, then you may want to set up separate trusts for each child, to assure that each gets an equal share.

• What should the assets be used for? You can specify that the trust pay for education, health care, food, rent, and other basic support. Given life’s unpredictability, however, it’s often better to write a general standard (e.g., “for the support of my children”) into the document and allow the trustee the discretion to decide if an expenditure is legitimate. Such a provision also gives the trustee flexibility. For example, if one of your children has an unanticipated expenditure, like a serious illness, the trustee could give that child more money that year than the other children.

  Be aware, though, that in some cases a vague standard might lead to litigation, as when a beneficiary sues to receive more support.

• When should the assets be distributed? Some parents pick the age of majority (18) or the age when a child will be out of college (22 or so). If all the assets are in one trust that serves several children, you would usually have the assets distributed when the youngest child reaches the target age. If you have separate trusts and a pretty good idea about each child’s level of maturity, you can pick the age that seems appropriate for each one to receive his or her windfall.

  If you don’t know when each child will be capable of handling money, you can leave the age of distribution up to the trustee (and risk friction between the trustee and the children), have the trustee distribute the assets at different times (say, half when the first child turns 25 and the rest when the youngest does so), or just pick an age for each child, such as 30.

  Or you can keep the money in trust for the lifetime of the beneficiaries. This protects the assets from the claims of the beneficiaries’ creditors. The trust can be flexible enough to own the children’s homes, businesses and other property to preserve assets.

The Younger the Child, the More Flexible the Trust

Where very young children are involved, it’s especially important to build in some flexibility into a trust created for their benefit. Who knows if a two-year-old may turn out to need special counseling or education by the time he or she turns five or six?

If You Don’t Have Much to Pass Along

Like any trust, a children’s trust costs money to set up: lawyers’ fees for creating the trust, fees for preparing and filing the separate tax returns required, and so on. For families of limited assets, it might be best to give the money via a custodial account under the Uniform Gift to Minors Act or the Uniform Transfers to Minors Act (See chapter 13). You would lose some flexibility (in most states the child gets the assets at age 18), but more of the assets would be preserved to pass down to the kids.