If you are a parent, you already know that everything changes when you become a parent. Along with obvious day to day changes, such as never sleeping through the night again, your priorities and estate planning goals also change. Protecting your child if something happens to you becomes a top concern. A Grand Forks trust attorney at German Law explains why estate planning for children often includes the use of a trust.
Why You Need More than a Last Will and Testament
Your Last Will and Testament was probably your first estate planning document and may continue to serve as the foundation of your estate plan today. While a Will can effectively distribute your entire estate after your death, you will need more than a Will to adequately protect the inheritance of a minor child because your minor child cannot legally inherit directly from your estate. As such, if you leave your minor child gifts in your Will, without making any additional provisions, a court may be forced to decide who will take control of those assets until your child reaches the age of majority. This is one of many reasons why a trust is often a better choice of vehicle for passing down an inheritance to your minor child.
How Does a Trust Work?
A trust is a fiduciary legal arrangement that allows a third party, referred to as a Trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. All trusts can be broadly divided into two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s (trust creator) Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason unless a court grants the right to revoke or modify the trust.
Estate Planning for Children
Knowing that your minor children cannot inherit directly from your estate, you may decide to use a revocable living trust or a testamentary trust to protect your children’s inheritance. A trust allows you to appoint a Trustee to manage and protect the assets you leave behind for your children. The trust terms can be used to decide how those assets are used while your children are minors and how and when the remaining assets are disbursed to them when they reach the age of majority. While the law considers a child to be an adult at the age of 18, handing someone that young a lump sum inheritance is not usually wise. Fortunately, you can also use the trust terms to stagger the distribution of the remaining assets in the trust even after your child(ren) reach the age of majority.
Moreover, you also have the ability to direct the proceeds of a life insurance policy into the trust at the time of your death. This is important because both life insurance proceeds and trust assets are non-probate assets, meaning they will be available to provide for your children immediately after your death instead of at the end of the often-lengthy probate process.
Whether you should use a revocable living trust or a testamentary trust is something your estate planning attorney can help you decide as there are advantages and disadvantages to both. For example, a revocable living trust can also be used to plan for the possibility of your own incapacity during your lifetime; however, because it becomes active during your lifetime, there are costs associated with administering the trust while you are alive, unlike a testamentary trust that only activates after your death.
Contact a Grand Forks Trust Attorney
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about protecting your minor child’s inheritance, contact a Grand Forks trust attorney at German Law by calling 701-738-0060 to schedule an appointment.