Continuing Trusts: A Solution to Outright Inheritances to Children

More often than not, a client will walk into my office and say they need a simple will with everything going outright to their children, in equal shares. However, leaving an outright inheritance to a child or other descendant, regardless of age, can be fraught with problems and unintended consequences.

Leaving medium to large sums of money to a minor child is problematic. First and foremost, minor inheritors lack the requisite capacity to manage inheritances; in fact, the same could be said of children who have reached the age of majority (18 yrs old). Thankfully, the law of Wisconsin acknowledges this obvious problem and precludes outright transfers to minor children unless the bequest is given in the form of a UTMA, custodial account, or a trust.

Although the Wisconsin law does offer some protection, the statute fails to address the true maturation timeline: the age the parent thinks the child will be ready to inherit. While children may have reached legal maturity, they typically do not have the financial knowledge to manage an inheritance from their parents or grandparents. Whether a young adult will exercise good judgment is uncertain. Mistakes will be made and a mentor may be necessary to help guide her/him around unexpected investment pitfalls.

Continuing trusts for children and descendents are created in a parent's will or trust to provide benefits and protection. Usually, when a trust is created by a parent or grandparent, it can be designed so the trust property is not subject to seizure by a creditor. In plain words, except in very limited cases, the trust can provide the best asset protection against the claims of creditors and predators, divorces, or a spendthrift beneficiary.

How can a trust do this? If property is held in trust, legal ownership is vested with the trustee (a trusted friend, relative, or bank), not the inheritor/beneficiary. By design, the beneficiary is often without the power to assign or sell her/his rights in the trust. Thus, it becomes impossible for a creditor to attach the trust property or to con the beneficiary into giving her/his interest in the property. That function provides significant protection against the beneficiary's own irresponsibility or mistakes.

Continuing trusts come in all shapes and sizes, such as the Pot, Spendthrift, and Discretionary Trusts. Every trust is customized, so one size does not fit all circumstances.

A Common Pot Trust is used when there is a wide range of ages among children. Pot trusts recognize the fact that if the parents' death occurs prematurely, one or more of the younger children may not have had the benefit of certain lifetime expenditures, such as college education. A common pot trust is drafted to hold the inheritance in one pot until the youngest child reaches a certain age or stage in life (such as graduation from college). A pot trust is also appropriate when children are still very young and the future financial need of each child is unknown. Hence, by structuring the trust in this manner, the trustee may expend trust assets unequally.

Spendthrift trusts are a form of restraint on the beneficiary's ability to give away the property in the trust. This type of trust is written to only pay out for the beneficiary's health, education, maintenance, or support. If the spendthrift clause is properly drafted, the beneficiary's interest cannot be reached by creditors and is generally excluded from the beneficiary's bankruptcy estate. In Wisconsin, however, certain tax claims and, understandably, child support obligations are not protected by the terms of the trust. Pure discretionary trusts offer the most intensive asset protection for a beneficiary. This protection emerges from the trustee's broad discretion in making distributions to the beneficiary. The trustee will have sole, absolute, and uncontrolled discretion to pay and apply trust income and principal to or for the benefit of the beneficiary.

The trustee can also accumulate and invest income without the requirement to make any distributions whatsoever to the beneficiary, even if the beneficiary needs money for education or medical expenses.

The above described trusts are not a once size fits all. Ordinarily, drafting a continuing trust requires an attorney to customize the terms of the trust to fit each client's particular needs and circumstances. By consulting with an estate planning attorney who is knowledgeable about trust planning, a parent can be assured that their minor child (or children) will be well cared for even after they have passed on.