Our previous post addressed what a trust is, in a generic sense, and we noted that one of the more common usages for a trust was as a probate avoidance tool by way of a revocable living trust. Another important trust is a testamentary children’s trust created in your Will(s).
Before I explain what a children’s trust is, it is important to realize that minors (persons under 18 years of age) cannot inherit assets directly.
What happens if a married couple passes away without any estate plan and they have minor children? In that situation it would be necessary to open a court-supervised formal probate and appoint a personal representative to sell and collect the assets and reduce them to cash. Then, there would also be a petition for guardianship and conservatorship of the minor children because the children would need someone to make parenting decisions for them (guardian) and manage any assets owned by their parents (conservator). Next, the personal representative, with the oversight of the court and the attorney for the personal representative, would be responsible for distributing the probate assets into the conservatorship. The conservator must make financial disclosures to the court every year, must document anything distributed from the conservatorship for the children’s expenses, and has limited investment opportunities for the money in the conservatorship. When the children turn 18, they receive everything left in the conservatorship outright.
If that sounds complicated and expensive, it’s because it is! Most parents don’t desire for their children to receive a large sum of money on their 18th birthday either. Thus, regardless of your financial situation, if you have minor children, it is extremely important to have an estate plan to accomplish the following objectives at minimum:
-Appoint a guardian or guardians for your children so there is no confusion or delay in knowing who should care for them.
-Create a testamentary children’s trust and nominate a trustee. Instead of children inheriting assets, the assets will go into a designated trust for the benefit of the children. The trustee can make distributions for the health, education, support and maintenance of your children, and will make the distributions of principal at whatever ages you decide are appropriate for your children. Clients sometimes choose to distribute half the principal at age 25 and half at age 30, as an example, but obviously it depends on your children, their maturity and the amount of principal that would be in trust for them. The trustee can invest the funds according to the prudent investor rule, so mutual funds and bonds are acceptable, and there is no mandatory court oversight or reporting to the court.
Completing an estate plan when you have minor children will protect your children from creditors, spendthrift spouses or significant others, provide you with peace of mind knowing there is no confusion about who should rear your kids, and save you money in the long-term by avoiding a more complicated and expensive conservatorship later.
-Posted by Steven G. Deckert
