The first goal of any trust is to avoid probate. Trusts provide for the transfer of assets from a decedent to identified beneficiaries without probate court supervision. Probate is costly, a lot of work, time consuming and open to the public.

Typically upon the death of a person, his or her assets are immediately or within a short time, transferred to the person’s beneficiaries or heirs. But there are reasons to defer distribution. Typically those reasons are:

• Care for minor children and pets

• Minimize or avoid estate tax

• Limit access to the assets by a spouse of a second marriage.

• Provide care for generations beyond the immediate next generation.

Minor Children: Children under 18 years of age can not receive assets. Children have no capacity to enter into contracts until the age of 18. If no trust is available to receive assets on behalf of a minor, these assets must be held under court supervision. This is the same probate court overseeing the distribution of assets when there is no trust.

Court supervision is costly, time consuming and open to the public. But the biggest problem is at the age of 18 all assets are distributed to the child who is now legally an adult. Not many 18 year olds have the maturity to properly manage such a large sum of money and the money quickly dissipates.

Estate Tax Planning: Each person can leave one million dollars without paying any estate tax. This is often referred to as the exemption amount. Transfers to spouses are not subject to estate tax. But if assets of the deceased spouse are transferred directly to the surviving spouse the exemption amount of the first spouse to die is lost.

Instead of distributing assets directly to the surviving spouse, assets up to the amount of the exemption amount are held in a new trust, under the supervision of the surviving spouse, until the death of the surviving spouse. The sole purpose for this exercise is to avoid estate tax on one million dollars in assets.

Second Marriage: A spouse who is currently in a second marriage may want to avoid distribution to the current spouse. This is because upon the death of the surviving spouse, he or she will often either intentionally or inadvertently distribute the assets to his or her children of a prior marriage, disinheriting the children of the first spouse to die.

To avoid this scenario, assets are held in trust, supervised and administered by a third party. The assets are available for the support of the surviving spouse, but upon the death of the surviving spouse, assets are distributed to someone else, typically, children of the first-to-die spouse. This type of deferral takes away from the surviving spouse the choice of distribution and restricts access to the assets.

Beneficiaries with Special Needs: A person receiving benefits for a disability will most likely lose those benefits as long as he or she has assets available to pay for expenses. Keeping assets in trust for a person with special needs does not allow access by the beneficiary and preserves government benefits. A third party is responsible for the assets which are used for the benefit of the disabled person.

Protecting Beneficiaries from Themselves: Most people need a few years of real world experience before they can properly manage a substantial sum of money or assets. People for the most part reach financial maturity between the ages of 25 and 35.

Pets: A deceased person’s pets require care. A certain amount of funds remain in trust for care of the pet by a trustee or designated care giver. For more information on Pet Trusts, click here.

Dynasty Trust: There is one more type of deferred distribution to consider and that is generation deferral. In other words, assets are not distributed to the next generation (children), but instead are made available to third generation (grandchildren) or generations not yet born. This type of trust requires careful drafting and must be funded with at least one million dollars, but no more than two million dollars. 

Why do this?  First, your children may not need the money. Second, money is the root of all evil. Too much money causes problems, just as too little money causes problems. Too much money takes away the incentive to make a living and creates dependency upon the money.

People who have not earned their money are fearful of losing it along with their lifestyle because they do not have the knowledge to create the money themselves. They become distrustful of others, thinking the only reason for the relationship is because of the money. Many people who inherit significant sums of money are unable to form meaningful relationships and drift through life without purpose. Other reasons to defer distribution for as long as possible are creditors, judgment creditors, lazy spouses and greedy soon-to-be ex-spouses.

So, keep the assets in trust, but make the assets available for life events, such as education, marriage, buying a house, health care and starting a business. Provide a jump start in your decedent’s lives, but do not become an enabler causing dependency on the efforts of others.

To schedule a no charge, confidential consultation, call 949-474-0961.