CHAPTER 7:
Trust Planning: Customizing a Trust for Your Family’s Needs
If you understand the basic roles and structure of the typical family living trust we have been examining throughout, much of the important work is done. Those concepts and issues apply to the trusts we’ll consider here.
Keep in mind that while you’re alive – as a practical matter – you can use trust property to do as you wish for your family.
When you and your spouse are gone, however, the typical family trust becomes irrevocable. Your successor trustee’s hands are tied by the provisions you have outlined in the trust document.
Now all we’re going to do is take a trust “chassis” and customize it with optional equipment in the form of various terms and provisions. Unlike different automobiles, you can pretty freely mix and match options among the various makes and models of trusts to create something just right for your needs.
You can do almost whatever you want when designing your trust – assuming the right successor trustee and enough money are available to achieve your wishes. Keep the customizability of trusts in mind when you see your attorney.
(Note – one final time – that, if you see a reference to “the trustee,” we are referring to whoever is serving at the time – either you as the original trustee or the successor trustee you have named as a backup. )
Attorneys have designed a variety of “workhorse” trusts to deal with certain life goals and scenarios that clients are concerned about, such as managing funds for their minor and young adult children, a special needs child, tax savings, and so on.
Trusts are especially useful for “blended” families that result when spouses enter a marriage with children from a prior relationship. In this situation, the new family can provide for whatever the spouses feel is appropriate for themselves and the children now, and in the foreseeable future. They can provide for the needs of the surviving spouse if one passes away.
But they can be structured so that any remaining money stays in each spouse’s family upon the second spouse’s passing. There is no limit to the scenarios the partners can plan for – if they have adequate funds on hand or through life insurance.
A trust can also be used quite creatively to deal with issues and situations that don’t come up every day, such as providing for a beloved charity or pet – or just a scenario unique to your family.
Keep in mind that a trust is essentially just a document with a series of instructions to the trustee. Some trusts tell the trustee exactly what to do in this or that situation. Alternatively, some trusts give the trustee – technically, the successor or backup trustee – some guidance, then allow discretion to do what appears best at the time.
Let’s look more closely at using trusts to achieve particular purposes. We’ll start with providing for young children since that’s a frequent issue of great concern to folks.
When Young Children Lose Both Parents at Once
Fortunately, this tragedy is statistically extremely rare – it is not a recurring life scenario. What is recurring is that most parents with young children ask about this almost immediately when preparing their wills: “What happens if we both die in an accident?” Since the question is so common, let’s address it: The answer depends on how much planning has been done. (The question is the same if both parents die separately, but while one or more children are minors.)
First, have you found a capable and willing guardian for the children? Second, will adequate funds be available to support them? Without a good answer to both questions, legal advice will not help much.
This Crash Course can’t help with choosing an appropriate guardian. Hopefully, you have a wise and reliable loved one – as well as an alternate – willing to accept this enormous responsibility. If so, the “pour-over” will accompanying your trust should name them. (Recall that such a will is so-named because it also serves to “pour-over” any assets into the trust that are not already there.)
The issue of “adequate funds to raise them” can be dealt with through life insurance. After all, most families would be in a tough financial spot after the loss of even one parent – whether they are the primary breadwinner or not.
But even with sufficient life insurance – without a trust – a problem is brewing. Often, parents have all their kids in common. Simple wills prepared for them are mirror images of each other. They have a clause to deal with the “common disaster” situation. Each parent’s will says, “I give everything to my spouse if they survive me by five days. Otherwise, all to the children in equal shares.”
The survival time might be different, but it’s always brief. The purpose is to avoid the need to probate a deceased parent’s will if the other parent happens to survive for just a few more days after an accident. If that happens – for practical purposes – the parents have died at the same time.
The problem? If both parents die together – and they don’t have a trust – the children will inherit all the family’s property immediately. In most scenarios, retirement accounts and insurance policies would be paid to the kids. (Same result with no will.) The inherited property will be under the control of the children’s guardian, to be used exclusively for their benefit.
But guardianship ends at age 18. At that point, a kid can take their share and run. This could be a substantial amount. Most would agree this is almost always a terrible idea!
What to do? Set up a trust. Make it – not your children – the beneficiary of your life insurance and other assets. Keep Transfer on Death accounts in mind. They can be designated as payable to your trust. (There are important special rules and considerations for retirement plans and IRAs if a trust is the beneficiary. Talk to your lawyer about this.)
By putting child-raising funds in a trust, there can be rules and strings attached to payouts. To increase the chances for success, the parents should include guidance to their successor trustee in the trust document. The successor trustee and the guardian can be the same person, but they don’t have to be.
You might have a bank or financially savvy friend or relative manage the trust, while the guardian handles the children’s upbringing. Of course, if there are two people involved, they must coordinate to ensure that trust funds are doled out to the guardian as directed in the trust.
Providing for Your Children as They Become Adults – Some Useful Trust Provisions
Trust provisions for minors and young adults deserve extra thought by parents and grandparents. With any luck, of course, at least one parent will survive well beyond their kids’ childhood. But we have to plan for no luck at all.
Unfortunately, some children remain irresponsible with money even after they have grown up. While at least one parent is still alive, they can take this into account when distributing money. Sometimes, however, both parents have passed by the time their children have entered middle age.
So this discussion applies to many families, regardless of the children’s ages. A trust can ensure that your children receive funds in a responsible manner if you’re not around. When establishing the trust, make sure to address practical issues that might arise. Try to avoid confusion and disagreement after you are gone.
Let’s Look at a Basic Decision First
All parents and grandparents want to ensure that no matter what happens, food, clothing, shelter, and education will be provided for the children. They also want to provide for special opportunities or unexpected problems. What’s the best way to handle this if you are gone and the successor trustee (your backup) is in charge?
If more than one child is involved, there are at least two broad options for handling trust assets: There can be a division into totally separate trust shares for each child, or a continuation as one fund for the benefit of all the children.
I favor the “single pot” trust approach. It allows more flexibility in dealing with emergencies, medical needs, or those special opportunities. One child might sometimes require more than the others.
This is the philosophy most parents have while both are alive; After all, if one child needs braces or suffers a broken arm, parents don’t generally give money to their other kids to “even things out.”
In either case, a total or partial distribution of trust assets can be called for at specified ages. Ages 25, 30, and 35 are often chosen. By then – hopefully – the beneficiary children will be mature enough to spend or invest it wisely.
Reasonable minds can differ on this, however. The drawback of the single pot approach is that it puts an extra burden on your successor trustee. They could be called upon to make financial judgments that even parents find very difficult in raising a family.
Instead of braces or medical care, for example, what about a tougher choice: Should the backup trustee spend money on piano lessons for little Olivia? She seems to be especially gifted in music. That sounds like a worthwhile expenditure, but is it fair to the other kids?
That’s why the more guidance the trust document gives to your successor trustee in this regard, the better.
By contrast, with the “one share per child approach,” the successor trustee’s hands are tied. They cannot spend more on one child than another. Whether that works out to be a good thing or not is impossible to predict. That’s why there is no “right or wrong” answer.
These matters should be decided by the client, not the attorney. The lawyer’s job is simply to bring up the matter for consideration.
Two Important “What Ifs” to Consider in Setting Up a Trust for Children
Some situations arise often enough that it’s worth addressing them while you’re setting up the trust for your children. Once you start thinking about this, you’ll probably add a few things to the list. Your backup trustee will appreciate the guidance.
Many parents specify ages at which their children are to receive all or part of their Trust distributions.
But . . .
What If a Child Asks the Trustee for an Advance Before a Scheduled Trust Payout?
No matter what schedule of trust payouts you establish or what size they are, at some point a child might request an advance. The trustee’s response, ideally, would be the same as yours: “It depends.” For a worthy purpose, you might pay. This portion of the trust might read something like:
“A child may request an advancement of their share of this trust. If, in the sole discretion of the trustee, the requested advance will be used for a worthy purpose, then the trustee may make such advancement.”
You might include a non-exclusive list of suggestions to help your successor trustee make a decision. There could be plenty of “worthy purposes,” so it’s a good idea to give the trustee discretion to make the final call. But here are three “worthy purposes” I have found many people agree with under the right circumstances.
- The purchase of a home appropriate to the needs and circumstances of the child
- The acquisition of a business interest, income-producing equipment or property in keeping with the age, training, and experience of the child – if the trustee sees a reasonable probability of success
- The education of the child in a college or trade or vocational school
Most serious requests (ones that don’t make the trustee laugh out loud) fall into one of the above categories. Of course, you can add to the list. If you feel comfortable doing so, you can also simply give the trustee the discretion to honor requests that seem appropriate and reasonable at the time they are made. After all, that’s what you would do.
Consider two scenarios to help illustrate how giving your trustee “advancement” authority might work in practice. Both scenarios involve families with a teenager.
Eric had turned 18, and for several months his parents had been nagging him to “do something” – get a job or go to school. Tragically, his parents were killed in a car accident while the boy was still moping around the house and hanging out with his friends.
Eric was the beneficiary of a trust funded by a substantial life insurance payout. The family’s bank was named as trustee.
For several months, the woman at the bank in charge of the trustee duties was content to advance Eric adequate money for living expenses and gave him time to make some decisions about his future. But the kid seemed content to continue doing nothing but live off the fat of the land.
Keisha, on the other hand, was 16 when her mom died of cancer. She had been ambitious from an early age, operating lemonade stands, babysitting, and eventually making and selling crafts and jewelry on Etsy. Her family, too, had set up a trust and there was money available to send her to a very respected college, as her father had always dreamed.
She was a solid student with A’s and B’s. Unfortunately, Dad died shortly after her freshman year.
The girl was still grieving by the time her sophomore year rolled around, and she really hadn’t enjoyed school as much as she expected anyway. So she decided to take a year off and go back to her Etsy business. She worked hard, got a few rave reviews and business took off.
Within a few weeks, she hired a couple of friends to help her handle the load. Keisha decided she could make a go of the crafts and jewelry business full-time. After all, she hated staring at a computer screen and loved being her own boss.
According to her parents’ trust, Keisha was not due to receive any money until she was 25. But she asked the successor trustee for an advance. She wanted to buy more materials and a laser cutting machine for leather goods.
That way she could keep a friend busy most of the time and keep up with demand. Hopefully, business would continue to expand. Maybe a brick-and-mortar store was possible someday.
The trustee spoke with family members, and everyone agreed that Keisha was a serious and responsible go-getter. Her previous experience had been successful, and the trustee determined that she had a good chance of success going forward.
Her idea was a worthy purpose in the trustee’s judgment. He approved her request for an advance of a few thousand dollars.
Meanwhile, Eric had turned 19 and met two men in their early 30s. Although they had no money, they impressed him with their supposed business credentials and big plans.
All they needed was some startup money from Eric to get things rolling on an exotic nightclub. So Eric asked the trustee for an advance.
The trustee quickly concluded that an advance payment to allow Eric to invest in a bar run by 30-something partners did not constitute a “worthy purpose.” With Eric’s history in mind – as well as the nature of the project – it was easy for the trustee to decline the request.
What If a Child Becomes Ill, Unstable or Impaired?
If this unfortunate situation arises, it is probably not a good idea to make trust distributions directly to the child, no matter how old they are. The successor trustee might be given instructions such as:
“No funds should be given to a child if, in the sole discretion of the trustee, the child is so afflicted with emotional instability or mental or physical illness – including drug or alcohol abuse – that the child could not reasonably be expected to support themselves or to prudently spend, manage or invest the funds if distributed.”
If funds are withheld, the trustee should be given discretion to pay whatever is necessary to provide for the child’s medical care or substance treatment, education and support, as appropriate.
Naming a Trust “Protector” – An Advisor or Watchdog to the Trustee
While one or both spouses are serving as trustees of a typical family trust, they know how to manage and properly disburse funds to their children. But since they won’t be around forever, the parents’ backup – the successor trustee – will likely appreciate some guidance.
The backup trustee might be a bank, for example, or a professional person who is trustworthy and competent in managing money, but who simply does not know you, your family and goals intimately.
How to handle situations where judgment is very much required but you’re not there? We just looked at the issue of advancing a trust distribution for a “worthy purpose,” for example.
If a bank or other professional is called upon to address such a request, they’re really in a tough spot trying to figure out what you would do. Depending on the instructions you set out in the trust, it might not be clear what you’d want your backup (successor) trustee to do in a particular situation.
So when they create the trust, some grantors appoint a trust “protector” or other advisor to their backup trustee. This might be a family member or close friend who is independent and does not stand to benefit from the trust.
The protector or advisor should be trustworthy, prudent, and know you, your family, and your goals. The protector or advisor will then be able to guide an institutional (or other) backup trustee as to what it should do in a particular situation.
If a bank is serving as the successor trustee, for example, the protector might tell them, “My late brother and sister-in-law, the grantors, had hoped to distribute $50,000 to my nephew now, at age 35. But he has a drinking problem. They would not have made that distribution until he sobers up.”
In many cases, the trust protector has even greater power, like the authority to remove the trustee and appoint another one under certain circumstances.
You want a trust protector or advisor who can faithfully use discretion to help fulfill your intentions, given a future set of facts that can’t be predicted today. Institutional successor trustees generally welcome their input – decision-making becomes easier.
If a protector is named at all, their precise role and extent of power should be clearly spelled out in the trust document. A fuller discussion of trust protectors is beyond the scope of this Crash Course. But it’s something to be aware of when consulting your attorney.
A Trust Alternative: A Uniform Transfer to Minors Act (UTMA) Custodial Account
As a practical matter, the family funds earmarked for a child’s (or grandchild’s) future might not be large enough to justify the cost of creating and maintaining a trust. In that situation, a UTMA account can be useful.
Virtually all states have a version of this law, which provides a simple way of giving to a child while retaining some control. A gift under the UTMA can be made either currently by you or others, or by providing for one in a will.
The account is absolutely the child’s property (only one child per account), but it is controlled by a custodian of your choice. That could be you, but you should also consider the person named as the child’s guardian in your will.
The custodian has broad authority to invest and spend for the child’s welfare, but the account must be turned over to the child, usually at the age of 21 to 25 (age 18 in some states).
The mandatory turnover while the child is still young is the principal drawback of this tool. But if the account balance is not expected to exceed $100,000 to $200,000, this can be a good college or trade school savings vehicle, for example.
The funds would be all or mostly expended after several years of school. Maybe there would be seed money left for the child to start a business or buy a home.
A cautionary note: Any expenditure by a UTMA account that fulfills a legal obligation of a parent is taxable income to the parent. So if you use UTMA account funds at the grocery store, that’s taxable income to you. On the other hand, if a guardian is spending money to raise a child because the parents have died prematurely, that is not taxable.
Banks and other financial institutions are quite familiar with UTMA accounts, and they’re easy to set up. The UTMA is a good thing to know about, as long as its limitations are understood.
Comments Welcome!
Share your experiences, problems, and solutions here.
Want to reflect on a challenging life situation? Share a solution? Leave a comment. We can trade experiences and perspectives, and give each other food for thought. (But remember, nothing here should be considered legal advice.)
Please do not post a comment that contains any links. It will be flagged and automatically rejected. This is to prevent automated spam and protect all of us from security threats. Please do not post any identifiable personal information, such as your real name or email.