McClellan Legal LLC Estate Planning & Tax Assessment Blog

Tuesday, June 24, 2014

Planning for Your Children’s Inheritance

One of the biggest decisions that people need to make when drafting their estate planning documents is determining how and when their children will receive their inheritance.  The law requires that a minor child’s inheritance be managed in a trust until they reach adulthood, usually 18 or 21 years old.  However, the problem arises when the child reaches 18.  Do you really want your 18 year old (or 23 year old for that matter) to have full access to all of your assets, which includes retirement accounts, life insurance payouts, home equity, etc.?  If you do not execute effective estate planning documents, this is exactly what will happen.

A better solution is to draft a Will that places the inherited assets in a child’s trust to be managed by a trustee (usually a family member), wherein the trustee will be responsible for managing the assets and paying the child’s expenses.  The child will receive the benefit of the trust assets but will not be able to demand principal until a triggering point that attempts to predict when child will have sufficient financial maturity to independently manage the assets.  Holding the assets in a child’s trust will provide asset protection from the child’s immature spending, from creditors, and from predators (e.g., a potential failed relationship).  Determining when a child will be financially mature is extremely difficult, especially when the children are very young. 

The most convenient method of predicting financial maturity is age.  In your Will, you can instruct the child’s trustee to allow the child to take more control of the inherited assets as the child reaches different age milestones.  For example, the child may be permitted to withdraw one-third of the principal at 25 years old, another third at 30 years old, and the remaining third at 35 years old.  The suggested age range may be set higher or lower depending on the child.  Often my clients prefer an older age range (e.g., 30, 35, and 40 years old).  However, age alone may not be a good indicator of financial maturity. 

In addition to age, you may also set additional trigger points to fine tune your child’s control over their inheritance based on other indicators of financial maturity, such as, obtaining advanced degrees or avoiding addiction problems.  Setting these additional triggers allows you to incentivize desired behavior and disincentivize against poor behavior.  Further, upon certain conditions, you may want to transfer management of the child’s trust to the child entirely. 

The final issue to consider is how your children will receive inherited assets that are controlled by beneficiary designations that will not naturally flow through the terms of your Will (e.g., life insurance, retirement accounts, etc.).  Often these beneficiary designation controlled accounts are your most valuable assets.  Unless the beneficiary designations are coordinated with the terms of your Will, your children may receive these assets outright at the age of majority.  In order to avoid this problem, you will need to prepare and submit custom beneficiary designation statements to the account custodian so that the custodian will know how to distribute the assets in accordance with your wishes.   

If you have any further questions regarding planning distributions for children, please call our office to schedule a meeting to discuss these issues.

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McClellan Legal LLC is located in Kennett Square and serves clients throughout the areas of Avondale, Chadds Ford, Coatesville, Downingtown, Landenberg, Oxford, Phoenixville, Pottstown, West Chester, & West Grove.

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