Structuring a Trust Fund for Your Children or Grandchildren

As a former trust officer for a N.C. bank, I was fond of saying, “trusts are bounded solely by your imagination and tax law.” There is a tremendous amount of truth to that statement as trusts can be designed to do almost anything.

For instance, did you know you can establish a trust to take care of your pet for their lifetime should you predecease them? As reported by attorney Daniel McKenzie, “Karla Liebenstein, a German countess, left her entire fortune to her German Shepherd, Gunther III, valued at approximately $65 million. Tragically, Gunther III passed away a week later. However, the dog’s inheritance passed on to his son, Gunther IV; the fortune also increased in value over time to more than $373 million, making Gunther IV the richest pet in the world.”

Ah, I digress, yet hopefully have piqued your interest! There are numerous types of trusts, but let’s focus on ones that can be designed to benefit your offspring as well as theirs.

First, you need to be clear as to your goals for establishing this trust.

Some goals that I have heard are:

  • I don’t want them to have the money all at once, but instead have principal distribution amounts at certain ages.
  • I’d like to establish some incentives for them to receive the money.
  • I wish to protect them from a spendthrift spouse or from themselves.
  • I want to provide supplemental income but not eliminate their need to work.
  • I want them to have access to principal in case of a catastrophic financial event but not for whimsical purchases.
  • I want to preserve the principal for them in case their spouse chooses to divorce them.
  • I want them to use the principal for a house purchase or to start their own business.

Once you have goals established, it’s important to obtain legal advice in drafting the document so that it conforms with current trust law as well as IRS regulations.

It’s helpful to be very specific. Suppose you want to encourage your adult child to work yet not stunt their competitive drive. You might design a feature of the trust to pay a principal bonus in the amount of their W-2 earnings for the year. This would encourage as well as reward them for growing in their careers. Or, you could stipulate for every dollar they earned; they would receive three dollars from the trust. What you’d be doing in both cases is offering incentives based on a verifiable document, be it a W-2 or paystub.

Another example is perhaps you prefer setting a specific percentage of the trust for them to receive at certain ages. At age 30 they receive 25% of the principal value of the trust; at age 40, 50% of the value of the trust; at age 50, 100% of the remaining value of the trust. Of course, you can determine the ages and percentages that match your individual situation the best.

Or perhaps you want to encourage their educational growth by setting incentives for earning higher education degrees. Hopefully you are noticing that the possibilities are endless as each individual situation is different.

Now that you’ve solidified your reasons, designed your trust, and determined who is to benefit from the trust, you’ll need to select a qualified trustee.

This is a role that should not be taken lightly as it assumes fiduciary responsibility. The trustee holds legal ownership of the property and has the power to handle the assets of the trust for the beneficiaries and their best interests. If you decide you want to name an individual, it is imperative that you discuss the role’s responsibilities with them upfront to determine if they accept. Most folks will lean toward a corporate trustee as they have the expertise and systems in place to handle complex trust matters.

Trusts for children or grandchildren are excellent vehicles if designed and administered properly. Your Parsec advisor is prepared to discuss your individual situation to determine if your family could benefit from one. Just ask!

Michael E. Bruder, CFP®, CTFA
Partner

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