Why Set Up a Trust for Your Children or Grandchildren?

If you are considering transferring wealth to your children or grandchildren, a trust is usually the best method. It is almost always the best way to protect an inheritance from potential depletion due to lack of financial acumen, lawsuits, divorce, bankruptcy, medical bills, and even nursing home bills. A trust also provides you with more alternatives for determining how and when your children or grandchildren receive funds and can include general guidelines or specific restrictions on how you’d like the money to be used.

With trusts, you can choose to distribute funds at key milestones over your beneficiary’s lifetime, rather than all at once. These can include when the beneficiary graduates from college, gets married, etc. Trusts can also be used to help your beneficiaries meet specific goals, such as buying a home or starting a business.

Choosing the Right Trust Option

If you decide that a trust is the right choice for transferring assets to your beneficiaries, there are many considerations and ways to structure the trust.  As always, be sure to consult with an experienced estate planning attorney, such as those at the Farr Law Firm, to discuss the appropriate trust to accomplish your unique goals. The following are a few popular options to consider:

• Education Exclusion Trust: The cost of education is continuously rising. Even a public college for an in-state student in Virginia, Maryland, or DC can cost upwards of $35,000- $50,000 a year, and it keeps going up! Because of these high educational costs, many if not most families need to rely on financial aid, including loans, to pay for college. An Education Exclusion trust is a trust that cannot pay for the educational needs of the beneficiary, so that the assets in this trust cannot be counted against the student applying for financial aid.
• When is an Education Exclusion Trust a Better option than a 529 plan?
  • 529 plans are generally a very good thing, except when they interfere with financial aid. Similar to a Roth IRA, a 529 plan is funded with after-tax dollars, grows tax free, and comes out tax-free so long as it pays for education. And with recent legislation, if the money in the 529 plan is not used for education, it can eventually be rolled over into a Roth IRA for the benefit of the beneficiary. See our recent article about the new legislation regarding 529 accounts here.
  • When a grandparent establishes a 529 account for the benefit of a grandchild, the assets in that 529 account, and any distributions made from the grandparent-owned 529 account, are generally not countable as being available to the student when applying for Federal financial aid using the FAFSA (Free Application for Federal Student Aid). See our recent article on the topic of 529 account owned by grandparents.
  • However, grandparent-owned 529 plans are still considered on the CSS Profile. The CSS Profile is an online application used by some colleges and scholarship programs to award non-federal institutional aid. The CSS Profile is an additional financial aid form used by about 200 private colleges to award non-federal financial aid. Here is a list of colleges that currently require the CSS profile.
  • Also, when a parent establishes a 529 account for the benefit of their child, the assets in that 529 account are counted as parental assets on the FAFSA, which can reduce need-based financial aid.
  • So, if you are a grandparent and you think your grandchild may apply for college at one of the colleges that uses the CSS profile, or if you are a parent setting aside money and a 529 for your child, but you are worried that there may not be enough funds and that your child might still need financial aid, then you should consider an Education Exclusion Trust instead of a 529.
  • Another major drawback for a grandparent setting up a 529 plan is that if you need nursing home care in the future, the 529 plan that you have set up for your grandchild could destroy your eligibility for Medicaid. Because you control the account and have the right to cancel the account and take the money out, the government considers your 529 plan a “countable asset.” That means you’ll be required to use that money to pay for your long-term care expenses before you qualify for Medicaid. An effective way to prevent this from happening is by setting up an irrevocable trust such as The Living Trust Plus® and making the contributions to the 529 plan from the trust.
  • For more details on 529 accounts, please read my many articles on the subject.
• Delayed Distribution Trusts: An example of this is a stipulation in your trust to distribute funds when the beneficiaries attain certain ages — such as 25, 35, 45, 55 — rather than all at once.
• Incentive Trusts: An Incentive Trust is an estate planning tool that can help incentivize and motivate beneficiaries to make the most of what you leave them. You can include specific language in the trust to convey stipulations or contingencies and include provisions that are helpful to the trustee in the administration of the trust for the benefit of the children or grandchildren. Until the beneficiaries have met the stipulations or contingencies, the Trustee is responsible for maintaining the inheritance and/or assets that are held within the Trust. Incentive trusts can offer your children or grandchildren guidance and support if you are unable.
  • You can also leave recommendations for your trustee, asking your trustee to consider approving distributions for paying college tuition, buying a first home, or addressing other goals such as starting a business.
  • You can also incentive your beneficiaries to achieve a higher education, receive good grades, and maintain a paying job, for example, by including these incentives in the trust.
  • You can even have your trustee match your grandchild’s funds to buy a new car, pay for education, etc., rather than having the trust pay the entire amount.
• Beneficiary-Controlled Trust: A Beneficiary-Controlled Asset Protection Trust (often referred to as a Beneficiary Asset Protection Trust) refers to a trust where the beneficiary is also the controlling trustee (as the sole trustee or co-trustee). The beneficiary can control, use, and enjoy the inheritance with fewer risks than outright ownership. This is a good option if you feel that your children or grandchildren are financially responsible and exercise good judgment, and you feel that they can responsibly control of the money you leave them.
  • Even with strong financial management skills, any money you leave directly to your children or grandchildren is still vulnerable to creditors’ claims, divorce, lawsuits, bankruptcy, medical bills, etc. By using a beneficiary-controlled trust, these risks can be reduced while allowing your beneficiaries significant control over their own trusts.
  • The beneficiary, as the controlling trustee, can make all investment decisions. Investments such as a home or brokerage account would be held in the name of the trust and would be better protected from lawsuits, divorce, creditors, and predators.
  • The beneficiary can make distributions for hir or her health, education, maintenance, and support.
  • The primary beneficiary could even resign as trustee, if they choose to do so, and appoint their best friend, trusted family member, or trusted professional to act as Trustee.

These are just some of the options for leaving money in a trust for children or grandchildren. To learn about these and other options and to determine which is best for your situation, be sure to make an appointment with the Estate Planning attorneys at the Farr Law Firm.

Plan in Advance for Your Children and/or Grandchildren

Whether you’re close to retirement, already retired, employed, or recently unemployed, it’s important to protect your quality of life in your golden years with estate planning and retirement planning, including long-term care planning, and including setting up trusts for children and grandchildren and discussing Medicaid eligibility.

Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care financial advisor through my affiliation with Protection Point Advisors.

Please call us to make an appointment for an initial consultation for Estate Planning, Long-Term Care Planning, Financial Planning, or Incapacity Planning:

Fairfax Elder Law Attorney: 703-691-1888
Fredericksburg Estate Planning Attorney: 540-479-1435
Rockville Elder Care Attorney: 301-519-8041
DC Retirement Planning: 202-587-2797