When children inherit assets from a Trust there are basically two ways for them to receive the assets. They can receive their assets “outright and free of trust,” which means their share of the Trust will be distributed into their name now with no further strings attached. Or their share of the Trust can remain in Trust—meaning a Trustee will continue to manage the assets on behalf of the child.
Distributions that are outright and free of Trust are easiest to understand because that’s the way most people think they will receive their inheritance. If I told you that your parents left you $100,000 as your share of the inheritance, you’d probably assume that the money will be transferred into your name. You’d receive a check or a wire transfer of $100,000 and that would be that.
By contrast, if the same $100,000 were to be held “in trust” for you, then you would not be receiving a check or wire transfer for $100,000. Instead, your money would be held by a Trustee and managed by that Trustee as a further Trust for your benefit. You don’t receive the money directly, but you would receive benefits from your Trust based on the Trust terms. For example, your Trust may say you are entitled to receive all income and as much of the principal as you need for your support. That means your Trustee should distribute some of the money to you when you need it, but not all of the money at one time. It’s as if you still have a parent dolling out money to you over time, but now the parent is the Trustee.
Trusts for children can be good, but they can also be bad. The single, most important issue with any Trust is the Trustee. If you have a good Trustee, then a child’s Trust can be great for several reasons. First, the Trustee is responsible for overseeing and managing your money. That’s a job you don’t have to do. This is good for those who are not knowledgeable about financial investing. And a good Trustee will consult with a good financial planner to establish a financial plan for your Trust.
Second, a good Trustee will ensure you receive support when you need it. The Trustee will talk to you regularly, ask what your support needs are, and plan both the investments and the distributions to meet your support needs.
Third, Trusts set up for children are generally protected from creditors. They also help maintain their separate property nature in the event you go through a divorce. Creditor and divorce protection are great attributes to a child’s Trust and can help protect the child for a long time.
If, however, you have a bad Trustee, then Trusts for children turn into a nightmare scenario. A bad Trustee won’t invest properly—may even lose money through bad investments—and will fail to make support distributions when required. Some Trustees are so bad they don’t even talk with the beneficiaries. This happens often with siblings where one sibling is a Trustee for another. These are some of the worst cases we encounter because now the Trustee is not just bad, but rather, they are acting with personal vengeance.
Unfortunately, many parents don’t understand the implication of their Trustee choices. They will name the oldest child as a Trustee or choose a Trustee based on who they like without considering how that person will interact with the beneficiaries. Many people refuse to consider appointing a professional Trustee to act because they think it will be too expensive. Professional Trustees include both corporate Trustees and private, professional Trustees (which are individuals who are qualified to act as Trustees). Not all professional Trustees are good, but professional Trustees tend to be better than individuals, especially siblings. And in the long run, naming a qualified professional Trustee will save the estate substantial money because lawsuits to remove a bad Trustee are both time-consuming and costly.
