By Sarah E. Messersmith, Estate, Trust & Wealth Transfer

There are many reasons why estate planning clients choose to create trusts. Until the repeal of the federal estate tax in 2010, trusts were used to capture and shelter the estate tax exemption amount of the first spouse to die. Of course, trusts of this type are still being used now, with the expectation that the estate tax will return by 2011, if not sooner. In addition, regardless of tax goals, trusts also are used:

• to avoid probate;
• to provide for blended families when the grantor may be survived by a spouse and children from a prior marriage;
• to provide for adult children with money management issues; to provide for adult incapacitated children; and
• to accomplish many other goals.

Although clients generally like the idea of trusts and appreciate the benefits that trusts can provide, some clients may be confused and intimidated by trusts. For example, it may be difficult to understand that revocable trusts begin to operate immediately and can be funded at any time, but will become irrevocable, change form and often divide into sub-trusts at the time of death. Some married clients also do not like the idea of having to separate and/or re-title their assets.

Nevertheless, for couples with young children, the need for a trust often seems unavoidable. Although the simultaneous death of a couple is rare and although a surviving parent may have an opportunity for more complex estate planning after the death of the first parent, young parents often feel the need for more than just simple wills. Wills can arrange to hold a minor child’s assets in a custodial account until the age of 18. Additional wording can be used to increase this to age 21, but this is the maximum duration for a custodial account. Understandably, parents are often uncomfortable with the idea of distributing material assets to a child at age 21!

In cases where clients do not have sufficient assets to justify complex trusts for estate and tax planning purposes and do not want to create living revocable trusts which involve the current transfer of assets, but nonetheless want to provide a safety net for their minor children, a children’s trust can be the solution.

The estate plan for a couple in this situation includes wills for the parents that leave all assets to one another. Then, at the death of the second spouse, all of the assets are transferred to the children’s trust. The parents also may name the children’s trust as the contingent beneficiary of their life insurance policies and, if drafted correctly, retirement accounts. The children’s trust may create a separate trust for each child and will pay income and principal to a child pursuant to the directions of the trust document. Of course, lump-sum payments may be made at certain ages and the trust will terminate at whatever age the parents feel is appropriate.

Additionally, parents can select a trusted family member, friend or advisor to serve as trustee of the children’s trust. The trust can be drafted to give the trustee significant discretion and flexibility with regard to payment of income and principal based upon the child’s then-current situation and can take into account changes in circumstances that occur as the child grows up. In this way, a trustee with good judgment is empowered to make decisions that are presumably similar to those the parent would make, had he or she not passed away.

A simple children’s trust is not necessarily an appropriate tool for clients who are particularly wealthy or who need or want more complex estate and tax planning. They are, however, very helpful and appropriate for less wealthy clients and are very easy for clients to understand. They also provide a certain peace of mind to clients with young children, because the clients know that there is a well-established mechanism in place in the event that they both pass away.

Sarah E. Messersmith is an associate attorney at Kaufman & Canoles, where her practice focuses on wills, trusts and estates. She works in the firm’s Hampton office and can be reached at (757) 224.2950 or semessersmith@kaufcan.com.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.