When planning how you will leave money to your children or other beneficiaries it’s important to think about trusts as an option.
A trust defines a type of legal ownership whereby property is held by someone (the “trustee”) who has agreed to act for and on behalf of your interests for the benefit of your beneficiaries.
Trusts are most often used to “gift” property to children. It has many benefits, one of the most popular being that trusts may qualify for certain tax exclusions.
Another key benefit of a trustee is that it puts in place some controls on how your beneficiaries can access and spend their inheritance. Many people fear that beneficiaries who are young adults may be still too ill-equipped to manage a sizeable estate, and for this reason choose to put their assets into trusts with certain safeguards.
As a parent you are likely preoccupied about the future security of your children, and would feel greater peace of mind knowing that your child would only be given access to limited amounts of their inheritance until such time that they attained a certain level of maturity.
By creating a trust, the property you leave to your children is protected by the trustee who will follow your instructions and will make financial decisions in the best interest of your estate.
Trusts are also beneficial in those instances where parents are leaving estates to very young children (minors). If your estate is left in a trust, the trustee will make decisions in the best interests and care of your minor children. They will only get access to the money when they are adults. The trustee will ensure that adequate sums are dispersed from the estate for the care of your children while they are minors.
When the trust ends, the remaining sum must be distributed to the child. The trustee must also provide to your child an accounting of how the money was spent over the years.
Another benefit of setting up a trust is that you will be able to avoid the privacy concerns and costs associated with probate. Probate is a legal process that takes place within a surrogate court. The probate process determines the instructions of the deceased and decides on an executor as the personal representative of the estate.
If it is important for you to ensure that your beneficiaries use their inheritance to fund their education, you can create a trust that makes money available to your children or other beneficiaries specifically for educational purposes only, such as university tuition and student accommodation fees.
Another type of trust is the kind that grandparents can establish to avoid a special transfer tax that may be applied because the gift is “skipping a generation” and not being given to their own children but their children’s children (grandchildren).
Section 2503 (b) trust: This type of trust requires an annual distribution of income from the trust to the grandchild while he is a minor. The funds can be deposited to a custodial account (under control of the parent) if the child is too young to manage the amount given.
Section 2503 trust: This particular trust requires trust income and principal to be used for the child until he is 21. At that time, the remaining money in the trust must be transferred to the child.
These trusts are governed under complex tax laws and it is recommended that a tax advisor be consulted before making any kind of decision regarding trusts.