Using a Trust to Keep Money Safe from Young Adults' Bad Decisions
September 23rd, 2016
A well-designed trust should protect your hard-earned assets and ensure the best outcome for each beneficiary. Young adults can be vulnerable to their own bad decisions in money, relationships, and spending; a trust can help protect their financial future.
An inheritance is not marital property. Funds that are held by a trust retain their protected status. With many marriages ending in divorce, everyone needs to consider the possibility of a breakup. Giving a child or grandchild free access to a trust can be risky. If the inheritance is used to purchase a home or a car jointly, it becomes a marital asset and will be divided during a divorce. And often, an angry ex-spouse might want a share of the inheritance. Despite intentions to educate beneficiaries on ways to protect the assets, the inheritance could pass to a former in-law during a divorce if it is carelessly mingled with the rest of the marital assets. Trusts can be drafted in a broad manner, but they are more effective when specifics are included. Certain provisions can be added to prevent assets from going to a beneficiary's ex-spouse.
The average American carries more than $15,000 in credit card debt. One medical emergency can lead to soaring expenses and frequent collection calls. After your assets pass to your beneficiaries, a spendthrift clause can protect the trust from creditors. This clause can apply to one or all beneficiaries. It can protect the income, the principal, or both. Spendthrift protection works by preventing the beneficiary from accessing his or her portion of the trust. If the beneficiary cannot make voluntary withdrawals, creditors cannot demand involuntary withdrawals. But certain transfers could remove this protection. For example, if assets are moved to a self-settled trust that the beneficiary controls, they won't be protected.
In 2015, more than 900,000 Americans filed for bankruptcy. It's more common than you might think. A spendthrift clause can protect the legacy you leave for your heirs from future bankruptcy and legal liability claims. The same concept that protects a trust from credit card creditors applies to bankruptcies. The general rule is that the bankruptcy trustee has the same power as the beneficiary. If the beneficiary has free access to the trust, the bankruptcy trustee can use the funds to repay creditors. If the beneficiary doesn't have access to the trust, it can be excluded from the bankruptcy estate. There are exceptions depending on the type of trust and the funds that creditors have provided. Your estate planning attorney can address these concerns.
Many people leaving an inheritance for children or grandchildren want that nest egg to be guarded to provide for their heirs' financial future. If you want to make sure the inheritance is used for education and not, for example, to purchase a new Porsche or Jaguar F-Type, a trust can help. Trusts can also help make sure the behavior of one beneficiary does not affect the rest of the family. A separate share trust can be set aside for each beneficiary. Thus, even if you want to allow your heirs broader access to the funds, one child's need does not necessarily affect another child's trust.
Creating a Trust for Young Adults
When you create a trust, you have the option to say when the beneficiary can access the funds and how the money can be used. You could say that your children will only be able to control the assets after age 30. Before that, you might specify the funds can be used to pay for college costs, for travel, for wedding expenses, or even for a first home. If you and your children have a love of watching the Olympics, you can even say the funds could be used to attend the games. In other words, trusts can be very specific. Estate planning documents are generally more effective when all possibilities are considered.
If you're ready to create an estate plan or set up a trust, contact an estate planning attorney. You should work together to assess your goals and develop an effective, safe way to achieve them.