Using Trusts to Protect and Provide for Children
Preparing for your death and the death of your spouse can be a difficult issue, especially for young families with children. However, it is nonetheless important: the lives and livelihoods of your children will depend on the steps you take now to protect them. You may think that you have this scenario covered by creating a will with distribution instructions for the children’s guardian. However, future medical bills, education, and sometimes even wedding costs should be considered as well. If your chosen guardian is unable to handle financial affairs after you're gone, the money you left for your children may be spent before they even reach adulthood. This scenario is painful, but it is also reality: each parent should try to prepare for their deaths by creating trusts for their children.
A testamentary trust is a trust that you establish through your will. This means that the only way the trusts ever go into effect is if both you and your spouse die. A testamentary trust assigns a specific trustee to watch over the funds according to your specific instructions. For instance, you can instruct that the residue of the trust (the interest) be invested in a pre-paid college savings account. You can even list specific needs for which the trust funds must always be accessible, such as medical expenses or childhood educational expenses. For instance, if your children were in piano lessons prior to your death, you can leave specific instructions that these lessons are to continue and be paid through the trust.
There is one disadvantage to a testamentary trust: the trust must be established through your will. If someone challenges your will or the court finds that the trust was not properly drafted, they can deny that portion of your will and distribute the assets in whole to the children’s guardian.
Revocable Living Trust
A revocable living trust is a trust that begins while you and your spouse are still living. During this time you and your spouse are the ones in control of trust assets. This ensures that not only is the trust upheld, it is never made a public record. In other words, no one will ever find out how much you left your children. Additionally, a revocable living trust leaves behind an example of how future trustees should distribute funds to your children. Returning to the piano lessons example, a monthly draw would exist on the trust account to pay for those lessons, going all the way back to when the account was set up. This will obligate future trustees to continue paying that expense.
Trustee vs. Guardian
As a parent, you sometimes feel the pull between being financially responsible and meeting your children’s needs. In order to ensure your children are loved and cared for at the time of your death, you can assign the roles of trustee and guardian separately. If for instance you feel that the children’s maternal grandparents will provide the most loving environment for raising your children, then you can assign them as guardians in your will’s guardian provision. But, if you're aware that they spoil the children too much and worry about the trust being depleted by their enthusiastic spending habits, then you can simply assign a different relative or friend to be the new trustee.
Setting Up a Trust
Setting up a trust to protect and provide for your children may sound like a lot to consider, but it is a step in the right direction to ensure your children’s needs are met. If you are ready to consider a trust for your family or just want some further information, set up a consultation with an estate planning attorney.