Parents with minor children clearly understand that their most compelling responsibility is to their children. But what if the unthinkable happens – both parents are suddenly gone. Someone will be abruptly saddled with the responsibility of caring for your children and making a myriad of financial decisions regarding the property you’ve left behind. Will they do the right things? Make the same decisions you would have? And how will this play out as the kids grow older? This really leads to the broader question – have you done any estate planning which addresses this potential catastrophe?
If the problem is unaddressed, the court will step in and appoint a guardian to care for the kids and maybe another person to manage your money. Regardless, as each child reaches 18 years old, they will receive a lump sum cash distribution for their share.
Is it a good idea to give children or young adults significant amounts of cash as lump sum distributions? Would they have the knowledge, experience, and maturity to manage the money properly? Probably not. Besides the overpowering temptation poised by the luxury car dealer down the street, unscrupulous friends and “advisors” may help them fritter away the funds in short order. Minors and young adults really need parental guidance as they transition to adulthood and eventually form stable family relationships.
But there is something else wrong with this picture. Actually, several things. It doesn’t take into account the unique needs or opportunities of the children at the point in time that the trust comes into being (i.e., when you die or become incapacitated). Nor does it take into account any prior investments you have made in the children. For example, you may have spent a considerable amount of money on tuition for the eldest child. Wouldn’t it be fair to give the other children the same benefit? Possibly one child worked incredibly hard and got accepted at an expensive ivy league school. Would you fund that achievement even if it meant less for the other children? Or maybe a child went to a service academy (West Point, Naval Academy…) receiving an outstanding education for free. If you provided a tuition fund, does that child get nothing as a result of his/her achievement? Or what if one of your children has a developmental disability? Or special needs due to an automobile accident? Or a drug or substance abuse problem? Or they have issues with creditors? The list goes on and on. Truth is, you just don’t know.
Another potential issue is protecting your children’s inheritance from creditors and unscrupulous opportunists. You may feel this is unlikely, but unexpected events can put your estate at risk. For example, a child is involved in a car accident and there is a substantial adverse judgement. As children grow up they get involved in relationships where the partner may exert an undue influence and have designs on the inheritance. Or a child gets married – then the unthinkable – a divorce. How do you protect money earmarked for the children from creditors or a wrathful and clever ex spouse?
The answer to this dilemma is a properly designed Children’s Trust and the right trustee(s). You provide guidelines to the trustee to raise the children as you would have done had you survived. An important consideration is that each of your children may ultimately receive different distributions from this pot of money. That of course reflects the fact that each child has different needs and opportunities and the trustee is spending the money according to your guidelines. Again, it should reflect what you would have done had you lived to raise your children.