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I’ve said it before and I’ll say it once more: trusts are best used for asset protection, not probate avoidance. But what do I mean by asset protection? I mean structuring the succession of your wealth so that when you’re no longer here, your child(ren) will receive your wealth in a way that supports their growth and shields them from undue influence or pressure from people in their life. Divorce can have a much more practical impact on your planning – especially if you and your spouse aren’t on good terms. Post-divorce, asset protection means keeping your ex-spouse away from the assets you’ll leave for your child(ren).
Generally speaking, unless your ex-spouse loses their constitutionally granted parental rights, they will be the sole legal guardian of your child(ren) if you pass away before they have reached the age of 18. And when a child receives an inheritance during their minority, it must be managed for them in a guardianship (or UTMA – Uniform Transfers to Minors Act) account. In the absence of some other plan that states otherwise, the legal guardian of the child will likely be allowed to be the guardian designated on the account. So – if you’re following along at home – if you get divorced and your ex-spouse survives you, they’ll likely be managing your child’s money, i.e., your money, until they reach the age of 18. Massive or minor wealth – doesn’t matter. There’s no good legal reason or recourse for someone to step in and prevent it from happening. Not ideal, right?
Trusts remedy the above scenario in a two of major ways:
1) Structuring Wealth Transfer
Under the default legal structures of inheritance, your child receives full and outright access to inherited wealth when they turn 18. When was the last time you met an 18-year-old who was mature enough to handle minor or massive wealth with no strings attached and no supervision. It’s okay, I’ll wait.
By utilizing a Trust, you’ll make sure all of your wealth passes in one stream-lined manner through a common structure. This means that your 401(k), IRA, life insurance, deposit accounts, brokerage accounts, home and personal effects will all be directed to flow into your trust, and your child(ren) will be the sole beneficiaries of your trust after you’re gone – one consistent method of asset succession. Within the trust, you’ll build out the structure of how your child(ren) will benefit from your wealth.
A lump sum distribution of everything at age 25? Sure. Separate distributions in equal amounts at ages 25, 30, and 35? Even better. Anything (well, almost) is better than the default rules.
Instead of inheriting a lump sum amount of money they didn’t work for at an age where bad decisions run rampant, they’ll have access to support when needed and when it can benefit instead of hurting them.
2) Appointing a Trustee
Don’t want your ex-spouse holding the purse strings of your hard-earned wealth after your gone? Appoint someone else to manage those funds while also being bound by a legal duty to always do what’s in the best interest of your child(ren). No self-dealing, no embezzling, no shady explanations for why “the Ex” bought a new house or a new car with your money.
But what if you don’t have any siblings or responsible family members to serve in this type of role? No problem. There are professionals available to help, and its something they do everyday. Corporate/Institutional trustees can be appointed in the trust to take over after you’re gone and pay for things on behalf of your child(ren), like tuition, computer equipment, books, room and board, a reasonable car, etc.
Trusts are essentially contracts between two parties: the creator of the trust (also known as the “Grantor”, “Settlor”, or “Trustor”) and the trustee of the trust. Many people think that a trust is like a separate legal entity similar to an LLC or Corporation. Not so.
The trust’s provisions create a rule book by which the trustee is bound to hold the Grantor’s property for the benefit of a named beneficiary. During your lifetime, you will serve in all three of those positions: Grantor, Trustee, and Beneficiary.
After you’re gone, your assets will pass to the “Successor Trustee” of your trust – i.e., the person you’ve appointed to pick up the torch and run with it after you’re gone. Further, the administration provisions of the trust will begin. The Trustee will be bound by a fiduciary legal responsibility to administer the trust assets according to the rules you’ve created and only such that it is serving the best interests of the beneficiary (in this sense, your child(ren)).
While probate avoidance can be a huge benefit to this sort of plan, the trust really shines in its ability to mold to whatever your wishes and goals are.
A trust can serve a number of different purposes, but it’s truly a “create your own adventure” planning tool. Trusts are meant to be as unique as your child(ren). Why would you allow a set of default rules apply to your child’s future when your context, love, and experience can help shape the perfect plan for them?
It’s pretty simple at its core: “What do you want to happen to your wealth and your child(ren) after you’re gone?” We can make it happen, no matter what it is, with a trust-based plan.
This type of planning requires you to be proactive, rather than reactive. It sounds cliche, but failing to plan truly is planning to fail. Don’t want to risk your ex getting his or her hands on your money even after all of the court orders and separation agreements divided things?