leaving money to adult children

Many individuals grapple with the decision of whether to leave their assets to their adult children, and perhaps even grandchildren, outright or in a trust.

They may have concerns that their children are not “good with money” and will waste away their inheritance on the purchase of non-essential items. Additional worries may include what happens to the inheritance if the adult child gets divorced, files for bankruptcy or is sued.

In light of these apprehensions, a discretionary trust where one can provide for one’s children but appoint a trustee to manage the assets and make distributions of principal and/or income for the children’s benefit may be the best solution. The trustee can be a sibling, a more distant relative, a family friend or even a financial institution. By appointing a trustee to determine how the trust funds are invested and to oversee their management based upon the terms of the trust, a trust creator (“Grantor”) can ensure that the trust money continues to be available and used in accordance with his or her wishes.

These trusts can be stand-alone (a separate document) or incorporated into one’s Last Will and Testament. Additionally, the trusts can either give broad discretion to the trustee, allowing the trust funds to be used for the beneficiary’s health, education, maintenance and support in unlimited amounts, or they can be more restrictive, specifying the narrow circumstances under which the trustee can make distributions to or for the benefit of the beneficiary. Likewise, the trusts can either last for a definite period of time, such as until the beneficiary reaches a specific age, or for the duration of the beneficiary’s life. Trusts that end upon a beneficiary attaining a particular age are typically very appealing to individuals who would like to leave funds to their adolescent children and/or grandchildren but who are concerned that their young heirs have yet to attain the requisite financial acumen to effectively manage their finances.

The funds held in discretionary trusts also have certain creditor protections: The beneficiary cannot use said funds to pay off his or her creditor claims unless the beneficiary has full access to them, and therefore, as long as the trust distribution is discretionary and controlled by the trustee, the beneficiary’s creditors cannot reach these monies, unless the funds are distributed to the beneficiary. These types of trusts can give you comfort in knowing that your money will be used for your adult child’s and/or grandchild’s benefit without becoming available to their creditors. There are also provisions that can be included in the trust so that the trustee can hold back the final distribution to the beneficiary, even if they have attained the specified age or event, if the trustee believes it is in the beneficiary’s best interest due to events that have transpired at the time of intended distribution, such as drug abuse or incarceration.

There is no one-size-fits-all solution when it comes to leaving money to your adult children. Careful consideration should be given to whether you trust your children to utilize their inheritance appropriately, and a review of their spending habits, maturity level and financial abilities can assist in your decision-making process.

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