“If we wait until we’re ready, we’ll be waiting for the rest of our lives.” – Lemony Snicket
Parenting is more than reading to your children or getting them to eat their vegetables. It’s also about securing their financial future. One way to do that is by drafting a trust and naming a trustee.
This is a great tool to consider, and it supersedes a will in many cases. It’s definitely something that every family should look into.
Here are a few questions to ask yourself to determine if a trust is right for your family:
Do you anticipate leaving your children more than a modest sum of money?
A trust may not be worth the effort if you think you’ll only be leaving a child (or children) $100,000 or less. On the other hand, if you’re leaving life insurance money to cover four years of school and you own a home, there’s a good chance a trust would make sense for you.
Do you want to have some say in how your children’s money is spent?
A trust allows you to restrict spending to basic support, including food, clothing, education and health care.
This is something that can’t be done with a custodial account. If the custodian is a soft touch, he could end up lavishing your child with designer jeans and a fancy car, leaving very little left for the college years. Even worse, if the custodian is also the guardian, he could start writing himself large “support” checks to help cover his other expenses.
Would you prefer that your children not inherit the money when they turn 18 or 21?
If you think giving a high-school senior a large sum of cash is a recipe for disaster, then you should consider a trust. The ability to delay inheritance is one of the great benefits of a trust.
Should something happen to both parents, for example, children can receive half of their inheritance at age 30, and the remaining amount when they reach 35 (or some other pre-established benchmark). Our 20’s are such a transitional time that it often makes sense not to burden children with weighty financial decisions.
Do you want the money to be used for a college education?
If you specifically bought life insurance so that there would be enough money to help fund college in the event of your death, then you’ll definitely want to delay the age at which your kids inherit your money. Otherwise, your child could think a red Ferrari is a better investment than a diploma.
Would you like your children to have recourse if their money is mismanaged?
One more benefit of a trust that you don’t get with a custodial account is that a trust is a legal contract; the trustee has an obligation to follow your directions and act in a reasonable and prudent manner. If the beneficiary feels the trustee spent the money frivolously, he can demand an accounting, and can sue for reimbursement if the trustee acted improperly with the funds. It may be pretty tough to prove illegal or improper actions with a trust, but just the threat of a possible lawsuit can keep someone in line.
