What You Should Know About Naming Adult Children as Beneficiaries in an Estate Plan
1. How should money be left to a surviving adult child?
There are three primary methods for the distribution of inheritance to an adult child.
2. Can outright distribution be deferred beyond age 18?
Yes, with a trust. For example, Parent’s estate plan might direct outright distribution, provided Child is at least age 30. If Child has not attained age 30 at the time of Parent’s death, the Child’s inheritance would be held in a general needs trust temporarily.
3. How does a General Needs Trust work?
A general needs trust can be configured in several different ways. For example:
4. May distributions of trust principal be paid in stages?
Yes. A general needs trust may be configured to pay out principal in stages. There are two approaches to consider. First, the trust might distribute principal in stages by age. For example, 1/3 at age 25, 1/2 at age 30, and all remaining assets at age 35. Second, the trust might distribute principal in stages by time. For example, 1/3 at the parent’s death, 1/2 five years later, and all remaining assets ten years later.
Both approaches give the child a second or third chance to handle the inheritance responsibly, even if the child fails to do so at first. Under the first approach, two children would likely receive their distributions at a different time, because one is older than the other. Under the second approach, two children would receive their inheritance at the same time regardless of age difference. The choice depends on personal preference.
5. Who should serve as trustee of a general needs trust?
If the child is young, irresponsible, immature, or inexperienced handling large amounts of money, the parent should consider naming a third party trustee. Depending on many factors, the third party trustee might be a close family member or friend, a bank or trust company, or maybe a professional advisor. A third party trustee can enforce the terms of the trust while protecting its assets from creditors and predators.
However, there is another option. It is becoming very common to name a child as trustee of his or her own general needs trust. This is similar to outright distribution in terms of control, but it provides additional protections a child would not have absent the trust. Referred to as an inheritance protection trust or a beneficiary-controlled trust, it can protect beneficiaries from losses associated with divorce, lawsuits, taxes, and poor financial management.
For younger children, the parent’s estate plan might name a third party trustee until the child has reached a specified age - say 30 – and then convert to a beneficiary-controlled trust at that time.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.
There are three primary methods for the distribution of inheritance to an adult child.
- Outright. The simplest method is to leave inheritance outright with no restrictions at all. Whether the transfer is accomplished by will, living trust, or beneficiary designation, this option is straightforward and gives the child full control of the inheritance.
- General Needs Trust. An alternative method is to leave inheritance in trust for a child’s benefit. Trusts are very flexible in their design. A general needs trust will usually permit distributions of income and principal for health care, education, support, and maintenance of the child until a specified age or event.
- Supplemental Needs Trust. This type of trust is used when the adult child is receiving needs-based government benefits due to a qualifying medical condition. The trust is permitted to supplement the government benefits without replacing them.
2. Can outright distribution be deferred beyond age 18?
Yes, with a trust. For example, Parent’s estate plan might direct outright distribution, provided Child is at least age 30. If Child has not attained age 30 at the time of Parent’s death, the Child’s inheritance would be held in a general needs trust temporarily.
3. How does a General Needs Trust work?
A general needs trust can be configured in several different ways. For example:
- Income only. The child receives all trust income, but no distributions of principal. This option may be combined with a right to principal distributions upon the child’s attainment of a specified age or graduation from college.
- Unitrust payment. The child receives a specified percentage of the trust principal each year. This option may be combined with a right to additional distributions upon the child’s attainment of a specified age or graduation from college.
- Discretionary income and principal. The trustee has discretion to distribute as much income and principal as needed for the child’s health care, education, support, and maintenance. This is the most common structure because it provides the strongest asset protection.
4. May distributions of trust principal be paid in stages?
Yes. A general needs trust may be configured to pay out principal in stages. There are two approaches to consider. First, the trust might distribute principal in stages by age. For example, 1/3 at age 25, 1/2 at age 30, and all remaining assets at age 35. Second, the trust might distribute principal in stages by time. For example, 1/3 at the parent’s death, 1/2 five years later, and all remaining assets ten years later.
Both approaches give the child a second or third chance to handle the inheritance responsibly, even if the child fails to do so at first. Under the first approach, two children would likely receive their distributions at a different time, because one is older than the other. Under the second approach, two children would receive their inheritance at the same time regardless of age difference. The choice depends on personal preference.
5. Who should serve as trustee of a general needs trust?
If the child is young, irresponsible, immature, or inexperienced handling large amounts of money, the parent should consider naming a third party trustee. Depending on many factors, the third party trustee might be a close family member or friend, a bank or trust company, or maybe a professional advisor. A third party trustee can enforce the terms of the trust while protecting its assets from creditors and predators.
However, there is another option. It is becoming very common to name a child as trustee of his or her own general needs trust. This is similar to outright distribution in terms of control, but it provides additional protections a child would not have absent the trust. Referred to as an inheritance protection trust or a beneficiary-controlled trust, it can protect beneficiaries from losses associated with divorce, lawsuits, taxes, and poor financial management.
For younger children, the parent’s estate plan might name a third party trustee until the child has reached a specified age - say 30 – and then convert to a beneficiary-controlled trust at that time.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.