Sometimes life doesn't turn out like you planned. You might have expected that you'd be comfortably wealthy before your thirtieth birthday, only to hit a few stumbling blocks so you still need help from your parents. If anything should happen to them, you'd be in trouble. They – or you, if you're doing long-term planning for your own kids – can make use of a number of types of trusts to provide for the next generation.
Many trusts are created with a list of detailed instructions as to what the trustee should do with the assets after the grantor – the person who made the trust – has died. Sprinkling trusts are an exception to this rule. If your parents give their trustee sprinkling powers, he can make disbursements to you at his discretion, whenever you're in need. He can directly pay for things on your behalf, such as your mortgage or rent if you can't swing it on your own. If you're having a cash crunch, you don't have to wait for the next scheduled trust fund payment – you can reach out to the trustee for help. The trustee typically has to approve your request, however. If you approach him because you're dying for a shiny new sports car, he may well say no. These trusts are ideal for families with several children, when it's impossible to foresee who might need help most.
Payments from a spendthrift trust fund can be made either at the trustee's discretion or according to terms set by the grantor. In either case, the trust retains ownership of its principal, either cash or cash-producing assets, and the trustee makes incremental disbursements to beneficiaries. If you're still financially dependent on your parents because you're just not good with money, you can't squander your entire inheritance because you won't receive it all at once. If you have a lot of rabid creditors at your heels, they can't reach the trust's principal either – they can only touch the payments you receive. If you have some concern for your own child because she's mentally or emotionally handicapped and you think she might be incapable of making wise financial decisions, this type of trust provides for her while still protecting your assets from waste.
Qualified terminable interest trusts work well if you've remarried and you want to make sure your children from your first relationship inherit from you, particularly if you have reason to anticipate that they'll be dependent on you past the age of majority. A QTIP trust also retains its principal. Your trustee can distribute payments to your spouse after your death, and your spouse can enjoy the use of its property, such as your home. When your spouse dies, the trust assets go to your children for their needs, even if they're adults by the time this happens. However, you might need additional trust or estate-planning mechanisms to provide for them in the interim.
Special Needs Trusts
Special needs trusts are particularly useful if you receive government assistance due to a disability, or if you have a child who you know will have ongoing needs. Many types of government assistance are need-based – the more your child earns or owns, the less assistance she'll receive. If you think she'll have need of Supplemental Security Income or Medicaid, she could lose both if she inherits from you through a regular trust fund. A special needs trust does not make payments to its beneficiary. It makes payments to third parties on her behalf so she never has control over or access to the funds. Therefore, their value doesn't count against her when she's qualifying for assistance, but she still enjoys your support and the fruits of your labors.
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