Even before children are born, parents worry about how best to care for them. Many forget though that one of the best ways to guarantee a family’s stability is through estate planning, which can provide for children and grandchildren beyond the parents’ lifetimes. For example, a trust offers financial stability to a minor child by allowing a trustee to oversee the assets as the parents expressly wish, far more effective than using a court-appointed guardian. Another option is a lifetime trust, which can maximize the assets of the trust while minimizing the impact of estate taxes.
Distribution Provisions
Complete estate planning includes distribution provisions, including flexible distribution options similar to a Bypass Trust. These provisions, called “descendants’ trusts,” can also apply to future generations. They allow for distribution of funds to cover health care, education, maintenance, or support, not only for the child but also for any descendants of the child. IRC § 2041(b)(1)(A).
Control of the Trust
Because generally the purpose of the trust is not to prevent a child from controlling the trust, the child and descendants often receive a “power of appointment” to allow for the distribution of assets. However, parents may eliminate the power of appointment if they do not want the child or descendants exercising that right. Another option which provides middle ground between these extremes is allowing a child to take control of assets gradually. Initially, the child may have no control over distribution of assets; as the child matures, they may become co-trustees; and later still, they may become sole trustee of the estate.
Protecting Assets
In addition to helping children mature into the role of trustee, Lifetime Trusts have other inherent advantages. If parents include the provision in their will, a Lifetime Trust can protect assets from creditors. Tex. Prop. Code § 112.035. Parents can also protect assets by choosing to shift income, particularly helpful if grandchildren are in a lower tax bracket than the children. Since the mid-1980s, assets transferred from grandparents to grandchildren have been subject to a generation-skipping transfer tax. IRC §§ 2621, 2622. However, an exemption from the GST Tax is available to each grandparent. IRC § 2631(a). If the assets are given to the children, the second generation, those assets are subject to the estate taxation. A Lifetime Trust can allow parents to meet their children’s needs, while allowing the trust to go to the grandchildren, thereby avoiding taxation of the trust. This option is available to parents whether they are currently grandparents or not. Any amount above $10.98 million may be placed into a separate “non-exempt trust.” When children become trustees of the excess trust, it will be taxed at the time of the child’s death, a lower rate than the GST tax. See IRC § 2612(a)(1)(A). Any distribution of funds at that point would come first from the non-exempt trust, decreasing its value and therefore the tax liability. Later the distribution would come from the exempt trust.
Estate plans which include trusts for children can ensure the stability and well-being of children and even grandchildren. A lawyer experienced in probate law can manage the intricacies of trusts, maximizing the estate’s assets for children, grandchildren, and beyond.
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