We have all heard negative connotations of the “Trust Fund Baby.” Some of you may have even heard a recent song on the topic (especially if you like boy bands). Unfortunately, this negativity causes many people to think they only need a trust if they are super wealthy. Nothing could be farther from the truth. Below are three reasons why you might want to consider turning your child into a Trust Fund Baby.
You are insurance rich.
Many of my clients are not wealthy; in fact, I routinely refer wealthy clients to outside counsel for advanced tax planning. However, a great number of the parents I work with are “insurance rich”. They live comfortably, but have made the wise decision to purchase sufficient life insurance to cover their families needs. What is sufficient life insurance, for most young families, it is typically in the ballpark of $750,000 – $3 or 4 million. (Disclaimer, I am not a financial advisor and you should consult one to see if you are properly insured.) The influx of $1, 2, 3+ million dollars into an estate is a major shift in the financial dynamic of a family. A well crafted trust puts control mechanisms in place to safeguard how that money is spent.
You have young children.
Young is a fluctuating term, it could mean 2 – 5 year olds, or it could mean 18 – 25 year olds. The reality is, whatever age your children are, you likely want to protect them from the evils of the world. The old adage, money is the root of all evil, comes to mind as I write this. Could an 18 year-old properly manage a gift of $500,000 or more? Certainly, however, most of us would agree that this is not the norm. As such, many of my clients will opt into creating a trust to control distributions to their children well after they pass.
Protecting them from themselves… and others.
A trust can also protect your children from other third parties. A trust can help shield assets from third party creditors, spouses (or ex-spouses), and even in some cases the government. It can also be used to make sure a minor’s guardian is not the same person who is handling your child’s inheritance. We see this a lot in estate planning with divorced parents and in situations where Aunt Sally is the perfect caregiver, but she is a poor money manager. How long you will be able to protect the trust assets depends on the size of the trust, but even smaller estates can benefit from these protections.
While it is certainly fun to watch how a high-profile trust fund baby represents his or her family on reality T.V., many families stand to benefit from creating a trust for their children. If you are ready to learn more about how a trust can benefit you and your estate planning objectives, give us a call, or request a consultation, by clicking here.