Children are expensive. But sometimes, one of your children is more expensive than the other. While most parents want to make their children feel equally valued and want to split their accounts and property equally between them in their estate plan, they also recognize that children have different needs at different times. That doesn’t always correlate with perfectly equal dollar amounts.
Instead of simply dividing assets equally among your children, consider placing them in a pot trust or common trust with instructions to your trustee on how to spend the money.
Benefits of a Common Trust
When it comes to passing down your money, fairness involves accounting for differences among your children. Because you spend money on each child as they require, inevitably, there are spending imbalances. When you’re setting up an estate plan, you’re acknowledging the possibility that you might not be around to care for your minor children.
A common trust can help. A common trust can help mirror the spending arrangement to the one you currently use for your children. It will provide your trustee with instructions that outline criteria similar to what you would typically use for spending money to meet your children’s needs and expenses. Dividing accounts and property into equal shares may not be the best way to achieve this goal. In particular, older children may benefit more from an equal distribution because you have already invested more money in their education and other costs. In comparison, younger children would be forced to use their share of the inheritance to pay for such things.
How Does a Common Trust Work?
The basic mechanisms of a common trust are as follows:
You set up the trust and list your children as beneficiaries.
You name a trustee to manage the trust on your children’s behalf.
The trustee makes trust distributions to your children as needed as you directed in the trust agreement.
The trust terminates when the youngest child reaches the age specified in the trust documents (for example, age eighteen or twenty-one).
When the trust terminates, any remaining accounts and property are divided into equal shares for your children. Upon completing other milestones, these shares could be immediately distributed outright, at certain ages, or at the trustee’s discretion. Which option you choose will be based on how comfortable you are with your children having access to the money and property, the value of the remaining money and property, and the potential for your children to spend the money and property frivolously.
You can also leave instructions to the trustee that say your older children can receive an advancement from the common trust to pay for expenses such as buying a home or starting a business. This would allow older children to have access to their share when they need it without them waiting for their younger siblings to come of age.
You’re not required to specify a particular age at which the trust terminates. You can choose an event, for example, when your youngest child graduates from college. Just keep in mind that such events might actually happen or may take longer than anticipated to complete, so including an age with the milestone can be a more-reliable marker, such as when the youngest child graduates from college or reaches the age of twenty-three.
Pros and Cons of a Common Trust
The most significant benefit of a common trust is flexibility. You’re giving the trustee the same spending discretion that you currently have. They will have to manage family dynamics, objectives, and interests. Choose this person wisely.
On the other hand, your kids might not see a common trust as the fairest option. Especially if they are much older, they could resent waiting until the youngest child reaches adulthood to receive their share of the funds. And by then, the funds might have been depleted (depending on the size of your estate).
Therefore, if there’s a significant age gap between your oldest and youngest children, a common trust might not be the best option. But if you have minor children who are close in age and you have an honorable trustee, a common trust is a wise option. For children with diverse ages or needs, you could choose to divide funds equally into an individual trust for each minor child or explore additional options.
To learn more about common trusts and how they can protect your children, as well as other essential estate planning tools, contact us for a consultation. Call Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton & the Tri-Valley area, at (925) 831-4840.