Protecting Your Children and Their Inheritance

When a person passes away and their minor children inherit assets, the children are not simply handed the money.  They are legally not old enough to handle it.  So, the court appoints a “conservator” or “guardian of the estate” to manage the child’s assets.  The conservator pays a lawyer to handle the affairs of the conservatorship with the court, including filing annual accountings.  The substantial attorney fees and court fees come out of the children’s money.  The court supervises expenditures from the conservatorship and is very strict about releasing money.  Conservatorships are very inflexible, and might provide much less for your children than you would want them to have.  When a child turns eighteen, the child receives his/her full inheritance all at once.  Even the most responsible teenagers are not likely to make good decisions when they receive a large sum of money.

The alternative is to take control away from the court-and to keep it in your own hands-by leaving assets in a testamentary trust in your estate plan.  That way, your children do not “own” anything.  Instead, a trustee who you choose makes distributions according to guidelines that you have put in place.  Usually, the trust requires the trustee to make distributions for a child’s needs (“health, education, maintenance and support”) and gives the trustee flexibility to make distributions above and beyond basic needs if warranted.  This allows a trustee to decide whether a child really needs money, as opposed to asking a judge to make that decision.

Tip:     Testamentary trusts have broad guidelines for distributions.  Is a backpacking trip through Europe “education”?  Or is it throwing money away on a party?  Explaining your wishes can offer a lot of guidance to your trustee about how your assets should best be utilized for your children’s benefit.

A testamentary trust can make distributions outright to your children as they get older, ensuring they will use money more responsibly than they would at eighteen.  For example, many parents like to say that the inheritance should be distributed to their child one-third at age twenty-two, one-third at age twenty-five and one-third at age thirty.  Using a trust lets you make your own rules for when money should be distributed to your children.  It’s even possible to have a trust for the child’s lifetime that protects the inheritance from creditors.

Talk to your estate planning attorney about whether your estate plan should include a testamentary trust. 

• You can use a testamentary trust to protect your children even if they are over age eighteen.
• As with a Power of Attorney, it is essential to pick someone you trust absolutely to serve as Trustee. There’s no court supervision.