McClellan Legal LLC Estate Planning & Tax Assessment Blog

Friday, September 27, 2019

Planning For Your Child'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 or grandchildren 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 depending on the state in which you reside. Then, the issue arises when the child reaches that age. It may not be wise to give your young adult child 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 the 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 overspending, creditors, and 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. 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 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 at 610-444-5552 to schedule a free initial meeting to further 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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