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Protecting Your Children’s Nest Egg

Parents often set up trusts as a way to ensure their assets reach their children and successive generations without being diminished by courts costs and taxes. When leaving assets to a child, parents will be faced with some choices on how to handle or set up their children’s future inheritance.

Should they leave them to the children outright (no longer held in the trust), how much and when should the children receive the assets and will their inheritance be protected from future creditors are amongst some of the questions a parent must ask.

Children, who are under the age of 25, are usually incapable of properly managing assets. Instead of leaving assets outright to these individuals consideration should be made to setting a continuing trust for them. The typical approach would be leave those assets in trust until the kids reach age 30 and distribute outright to them ½ of the balance at 25 with the balance at 30. The trustee (or manager) would have full discretion to distribute as much money as that child needs prior to age 30 for that child’s health, education, and support.

Although, the typical approach protects the child from squandering the assets, provides incentives to become educated and a productive member of society, it doesn’t provide any protection from their future creditors. So for example, if that child becomes a doctor, lawyer or real estate developer – or just gets sued for any reason – their entire nest-egg could be gone in a blink of the eye. Their inheritance is also not protected in the event the child files for bankruptcy or their marriage fails.
Safeguarding your children’s life savings can be done with a trust that is set up for that child’s lifetime. The child still retains the full ability to control their assets. The parents can determine at what age the child is able to take control of the trust. When the child reaches that age, the child is then given full and complete control over the assets, rather than receiving full distribution of the trust assets and the trust terminating.

The trustee prior to that age still has full discretion to distribute to the children prior to the pre-mandated age as much as they want from the trust for day to day living, support and maintenance. However, if a lawsuit arises, their marriage fails or the child files bankruptcy those assets are protected inside the trust.
After the child dies, the assets remain in the trust for successive generations, which may include grand-children and great grand-children or other beneficiaries. How long the asset can remain in these trusts depends on the law in the state in which it is established. For example, a trust established in Nevada can last for 365 years, while California allows for only 90 years from when the trust comes into existence. This is usually when both parents die.

For this protection to work, the children themselves are not able to establish a lifetime asset protected trust. The trust for the children – or other beneficiaries – must be established by a parent or grandparent with their assets prior to the child receiving them. Once the child has received the assets outright, this protection of a beneficiary controlled trust is gone.

Our Personal Family Lawyers® can help you determine how to structure your children’s future inheritance. How the trust is structured will depend on a variety of factors including: personal preference, amount of money involved, and your level of concern.