My spouse and I have recently had children. If something happens to both of us, we want to leave our money to our children. What are our options since they are still very young?
In New York, if you pass away while the child is a minor, and you do not have a will, that child will receive his or her entire inheritance once the he reaches the age of 18. However most parents do not want their 18-year-old child to inherit their entire parent or parents’ estate at such a young age because the child may not be mature enough to handle what could be a sizeable amount of money. This is particularly true for a child or children who have suffered such an unspeakable loss at a young age. For that reason, it is important to have a will in place and create trusts to best suit your needs.
A Last Will and Testament contains a “Minor’s Trust” that is intended to hold any property left to a minor child — defined by you in the will as someone under any age — 18, 25, 30, and so on.
In general there are two types of structures. The first is called a “pot trust” or “sprinkle trust,” which means that all the money goes into the “pot” to be used for the benefit of all children who are beneficiaries of the trust.
The pot trust usually grants the trustee full discretion to make distributions for any reason, or imposes an ascertainable standard such as “health, education, maintenance, and support” (sometimes referred to as a “Hems” standard). This type of trust is most appropriate for when you have two or more young children who would live with a guardian. In some respects, a pot trust is more manageable for a trustee and is more appropriate because the majority of the expenses will be attributable to the children as a whole, such as food, or are expenses all children would benefit from, such as summer camp. This type of trust allows the trustee to act much as a parent would by not requiring the trustee to keep separate records for each child and not requiring distributions to each child are exactly the same. With such a trust it may be most appropriate to make the trustee a different person from who you are appointing the guardian of your children to ensure a check on the trustee’s distributions.
The second option is to create a separate trust for each child. This trust is more appropriate for older children or young adults because each child will have different needs and expenses of greater variance and at different times. At your death your estate is divided equally among your children and each child gets his or her own trust. Most likely you will have the same trustee for all the trusts, but the money is kept in separate sub-trusts for each beneficiary. This allows different options and scenarios regarding distributions from the trust by the trustee. Usually the trustee has a standard for discretionary distributions of principal, such as “for health, education, and maintenance.”
You may also want to include distributions of income and-or principal (the corpus) at one or more specified ages to the child directly. There are various options. A common methodology is to provide for half at age 25 and the remainder at age 30. You can also make those distributions contingent on graduation from an accredited college, and delay those distributions to ages 30 and 35 (or later) if they do not graduate college. You can also split it into thirds, or give the trustee discretion to keep the property remaining in trust for tax purposes or creditor protection purposes. If you are drafting your will when your children are young, you may considering implementing a combination of these two trusts.
The specific terms are driven by your own particular objectives and concerns, which are different for every person. It all depends on your family’s situation financially and your children’s ability to handle money. A good way to work through these decisions is to assess the estimated value of your estate (including life insurance), how much money would be in your net estate (your gross estate less any major liabilities like a mortgage). Consider how many children you have or plan to have, and how much money is estimated to be available for each child.
For a larger trust, you might consider multiple distributions of principal over a longer period of time.
For a smaller trust, one or two distributions is probably more efficient.
As he grows, you may find you have a very responsible child and so you may not need to spread the distributions as far out; or you may find you do not think he could handle a large amount of money at one time so you may want to consider delaying the distributions until a later age.
Regardless of what you select, you, your plan, and your children will all be changing as your children mature. It is critical to review these and other provisions every few years to ensure that your plan continues to be suited to your current situation.
Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists new and not-so-new parents with their estate planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Besunder on Twitter @estatetrustplan and on her website at www.besun
