Today, middle class people are leaving hundreds of thousands of dollars or more to their children. Often, parents are concerned about leaving such a large sum of money to spendthrift children - - those who spend money as soon as it hits their pockets.
In such cases, the best plan may be to use a trust to pass on the inheritance. After death, the child receives the inherited assets in a trust. A common approach is to distribute 20% to the child at age thirty, one-half of the balance at age thirty-five and the remaining balance at age forty. The ages of distribution can be to your liking but the hope is that advanced years will temper flagrant spending. Several clients have stated to us, "If they don't know how to handle money by age forty, they probably never will."
Some parents want to go further and keep the assets in trust for the child's lifetime, also called "ruling from the grave." For example, in your own trust, you direct that upon your death, or, if you have a spouse, upon the second death, the spendthrift child's share is held in trust with perhaps a family member and your attorney as co-trustees. The child's trust stays in effect for his lifetime and the trustees may use the assets for the child's health, education, maintenance and support. Upon the child's death, the trust assets pass to your grandchildren.
A "sprinkling" or "spray" trust can also be used to pay out distributions not only to your child but also to your grandchildren, again based on the standard of health, education, maintenance and support. The distributions to the various beneficiaries don't have to be equal, in case one is going to a community college and the other gets into any Ivy League school.
You may have heard that "30 is the new 20," meaning that children take longer to mature and get started in life. We're also seeing more adult children living at home with their parents, perhaps in part due to the economic times.
These trusts also protect the children from their divorces, lawsuits and creditors, and are called "Inheritance Protection Trusts".
For children who are less proficient at running their financial affairs, passing their inheritance to them with controls can assure parents that their money won't be spent lavishly on vacations, fancy cars and consumerism.