Trusts for Young and Minor Children: The Basics

April 8, 2019

In Wisconsin, trusts can provide a powerful tool for parents eager to protect and pass their assets to their children. More specifically, trusts for children bring the power and flexibility of trusts to bear when parents die before their children.

This article sets out the basics of trusts for children, highlighting the importance and value of using a trust to transfer assets to children.

Assets Left to Minor Children without a Trust

Upon the parents’ death, young and minor children will receive their inheritance outright as owners if proper estate planning is not completed in advance. If a child is under 18 years of age, a Wisconsin Guardian will be appointed to be in charge the child’s funds until that child reaches the age of 18. Then, the funds will be given to the child to do with as the child pleases.

Failure to leave assets in a trust can result in a teenager gaining control of assets at a time that he or she may not be able to make sound long-term financial decisions.

Assets Left to Adult Children without a Trust

For a child that is 18 or older upon the parents’ deaths, the child will receive the inheritance outright. The child will have immediate control over the funds. The child will be able to do as he or she pleases with this new wealth.

If an 18-year old or older child has a substance abuse problem or other major problems, this approach may cause the child significant challenges that could be avoided with a trust.

As estate planning lawyers, we often counsel our clients against leaving assets directly to minor or younger children. In our experience, we’ve found that very few younger children  are responsible enough to make wise lifelong financial decisions. That’s to be expected – they are children. They should not be required to make major financial decisions if that can be avoided.

Do Not Leave Assets to Anyone Other Than Your Child

Sometimes parents leave their assets to their own parent, brother, or sister, for their children. The expectation is that the family member receiving these assets will use them for the deceased children’s expenses. Unfortunately, our experience is that such an approach seldom turns out as planned.

Generally speaking, there are a number of issues with this approach.

1. First, the person who receives these assets then owns these assets. They are the assets of that relative – and not the assets of the deceased’s child. If that relative dies without an estate plan that passes those inherited assets back to the children, those assets will go to that relative’s spouse or children.
2. Second, if that relative decides to use the funds for their own needs, this is perfectly legal as they are not your children’s assets.
3. Third, if that relative ends up in a nursing home, the relative may lose these assets to the nursing home as they are the parents assets.
4. Fourth, if that relative divorces or has financial problems, they are likely to lose these assets.

In short, there are many risks and reasons not to leave assets meant for your children to others. It may sound good in theory, but in reality, it rarely works out well. In fact, it often results in lost assets or family feuds.

Advantages of a Trust for Young or Minor Children

When the parents pass away, a trust estate plan will place your younger or minor children’s share into a trust for the child’s benefit. The trust assets are owned by the trust – and not by anyone or anything else.

While trusts require a trustee, a trust does not allow the trustee to access the assets in the trust for the trustee’s own financial needs. As such, should a trustee run into financial problems, divorce, or addiction issues, the assets in the trust are not assets owned by the trustee.

To be clear, the trustee of the parents’ choice oversees the assets in that trust for the child, but the trustee does not personally own the assets. Your child’s trust owns the assets. This is a crucial legal distinction that has a lot of real-world implications.

Trusts for Children: Flexible Options

As an estate planning vehicle, a trust is both flexible and versatile. Our estate planning attorneys can help ensure that your trust is crafted in a way that best protects your children. For example, the trust could pool your money into a single pot for all of the children. Alternatively, the trust could create separate trusts for each child. The ages and needs of the children, in consideration with other family characteristics, will help guide the decision on how to proceed.

A Trust to Help Guide the Trustee

The trustee of the trust into which your assets pass to your children will be responsible for spending your money in a way that’s in keeping with your wishes. They will to carry out your wishes by using the assets in the trust, for example, to pay for your child’s schooling. Your trustee can try to use the funds as you would have used them if you were alive.

Including details about your wishes and aims in your trust can help make the task of the trustee easier, by sharing insights into how you feel about spending money on this need or that need.

Choosing the right trustee is a very important decision. We have previously shared our thoughts on choosing an individual trustee.

What Happens When a Child Grows Up?

Most trusts state that when a child reaches a certain age, such as 25 or 30, the remaining funds not spent on the child will then be distributed to the child.

As experienced estate planning attorneys, we typically include provisions that allow the trust to continue past the stated age if the child has a drug, alcohol, gambling, or other legal capacity issue. We also provide for creditor protection and divorce protection through a spend thrift clause that allows the trustee to hold funds back and use the funds for the child, if the child has financial or other issues. Asset protection for a child can be a nice bonus for most trusts set up for children.

Some parents provide that funds can be used for a child’s education, support and health care, but can then provide that lump sums will be disbursed to the child at certain ages.

For example, lump sums might be disbursed as follows:

• One-third of the funds at age 25,
• One half of the remaining funds at age 30, and
• the remainder at age 35.

Some parents will provide higher ages or even a lifetime trust where the funds are only disbursed upon the child reaching retirement age.

Finally, some parents provide for incentive trusts to direct certain behaviors, such as distributing a lump sum upon graduation from college or other specified life events.

Supporting a Child with Challenges

For a child with known problems, trusts will typically not provide for a lump sum disbursement. Rather, the trust will continue for the child’s lifetime or continue until the trustee is fully satisfied that the child is on the right path, and can handle the funds.

What If the Child Passes Away?

Normally the parents’ trust would direct who will receive assets if a child predeceases the parent. Yet where a child passes away after a parent, the trust can allow the child to direct who will receive the assets if there are funds in the trust upon the child’s death. For example, this might be to the child’s children or the child’s spouse. This inheritance redirection is accomplished through a “power of appointment”. The power of appointment recognizes that while these funds are held in trust for your child, your child is entitled to decide what happens to these trust funds if he or she should pass away.

Another option is that the parent directs what will happen to a child’s funds if a child passes away while the child’s trust has funds remaining. For example, a parent could direct that it will be distributed to the parents other children.

We Are Your Trusted Estate Planners

Trusts are an important and necessary part of a quality estate plan for minor or younger children. At Wokwicz Law Offices, we have been helping parents take care of their children for generations. We invite you to contact us to today to talk about how we can craft a trust to pass your assets along to your children in a way that best provides for them.