Planning Pays Off When Leaving Money to Children

Strangely enough, last week’s column — which reveled in the fulfillment of those who are able to reconcile their sibling rivalry before they die — nevertheless prompted a number of calls from potential clients who are unable to reconcile the rivalry with their brothers or sisters.

Each of them had a story based on alleged fraud and deceit regarding the handling of their parents’ revocable trusts.

In every case, the theme was that an older or younger sibling had somehow gained control over the disbursement of funds in the trust in an attempt to cut a brother or sister out of the percent of the assets they were apparently due under the trust. These children had not reached that epiphany of realizing the only thing that matters when you near the pearly gates are those family members and others you love and who support you. Apparently that requires laying on your death bed.

But when it comes to the sibling rivalry after the parents are gone, it doesn’t so easily come to a halt. In fact, it grows worse because the siblings left behind still believe that money is more important than loving the sister you never got along with during the past 20 years. These cases are resolved only through litigation or arbitration.

However, this type of unforeseen rivalry can be easily avoidable by putting enough thought into your revocable trust during the course of your estate planning.

As for leaving money to children, there is much to take into consideration depending on the age and temperament of the child. The older you get, the more outrageous it seems to leave a large sum of money to an 18-year-old.

It is commonly recommended that a trust be used to stagger payments, possibly at ages 23, 26 and 30. The expectation is that at 23 your son will want to buy a Porsche, at 26 he will have graduated college, and at 30 he will have settled down and knows what he wants to do in life. For others, the ages of 20, 30 and 40 sound more appropriate.

Yet some parents may want to provide for their children’s education and then leave the rest of the money to charity. This is easily accomplished through a wonderful tax-saving device known as a charitable remainder unitrust (CRUT).

A CRUT is very flexible and will allow you to — among other things — sell stocks with a very low tax basis at a very high price, and not pay any capital gains taxes on the appreciation of the stock. It works the same for highly appreciated real estate. As you will see, whether used to pay for the education of your children, or to provide a percentage of the income to you for retirement, a CRUT is a valuable tool in estate planning. (See Chapter 16 of my book for more details on CRUTs).

The normal prerequisite of a trust for children is that it protects the corpus (that amount of money in the trust) from them — thus the name “spendthrift trusts.”

Another way of helping young adults manage money, rather than keeping it from them or forcing it on them, is to allow them to withdraw money from the trust as they believe they need it. This essentially allows them to be their own trustee without the responsibility of managing the entire sum of money in the trust.

Another way to manage children’s money is to establish a family pot trust that can be distributed to each child in accordance with his or her needs, according to the trustee’s discretion or by the terms in the trust. Another way is a minor’s trust, and yet another is a custodial account — and there are more.

Therefore, as you can imagine, there are many ways to plan your child’s inheritance. Most parents are afraid a trust may be a distraction for a young person. They believe it might rob the children of their incentive to go out in the world and do well. More than one child has been lured away from college or taken up a life of drugs because the easy money was there with no conditions required before getting the money.

These concerns can be relieved by language in the trust that stops money when the child is not enrolled in college full time, fails to maintain a certain grade point average, gets arrested more than once or violates some other standard of conduct that was outlined in the trust.