Why You Need a Trust (Even if You Trust Your Children)

Creating an estate plan is essential for distributing your family assets with the least cost and complications. You have several tools available to create an individualized plan, including a will, power of attorney, medical directives, and various types of trusts. The living trust is among the more popular estate planning tools, also called an inter vivos trust.

As the trustee, you control the trust, which can be revoked or canceled at any time. Assets can be distributed during your lifetime and following your death by a successor trustee according to instructions outlined in the trust.

One of the primary uses of a living trust is to allow assets to pass to beneficiaries while avoiding the delays and cost of probate. A living trust can also dictate the timing and use of assets to be transferred to heirs. This is useful if your children are still minors or if you don’t entirely trust that your adult children are mature enough to make good decisions about their money.

Do You Need a Trust if You Trust Your Children?

But what if you do trust your children? Do you need a living trust if you trust them to make the right decisions? 

If your assets are held in investment, bank, or retirement accounts, they can pass automatically, outside of probate, by beneficiary designation, as can life insurance proceeds. So technically, a trust is not necessary to pass these assets.

Transferring real estate presents more significant challenges, but there are ways to pass it to children without drawing up a trust. You can gift it to your children while alive, which means it won’t go through probate after death. The downside with that approach is that your children will assume your original cost basis on the property, which can expose them to a hefty capital gains tax if they sell it.

While having children who share your values and attitudes about money can make it much easier to transfer your assets without a living trust, one critical reason you should still have one—is to protect their assets from those you don’t trust.

When You Trust Your Children but Not Necessarily Their Spouses

Seeing your children find love and marry the person of their dreams is one of the joys of being a parent. You may love your daughter- or son-in-law and how they make your child happy. But, if you’re being honest, you have to consider that nearly half the marriages in the U.S. end in divorce. Many divorces come out of nowhere, and while some marriages end amicably, many don’t.

It may not be pleasant, but when planning for your children’s future, you must prepare for a worst-case scenario. Your first concern should always be to protect your child’s wealth. A revocable living trust can protect your child’s assets from a scornful ex-spouse looking to procure your son or daughter’s wealth.

You can always wait to set up the trust if you prefer. Or you can set it up right away with provisions to protect your children for life regardless of when they marry.

How to Protect Your Children’s Wealth with a Living Trust

One way to structure a living trust for your children’s protection is to assign their share of your assets to the trust to be held for their benefit. You can time distributions around age milestones such as when they turn 40, 45, 50, and so on. Limiting distributions reduces the risk of an ex-spouse getting their hands on your children’s assets.

Alternatively, you could instruct the trust to hold your children’s share of assets for their entire lifetime. When a child passes, the assets can pass directly to your grandchildren or whomever you choose as a beneficiary. In the meantime, the trustee could support your children as needed.

Protecting Your Assets from Creditors

What About an Irrevocable Trust?

You could also consider an irrevocable trust, which can be more complicated and expensive to set up, but it can ultimately protect your children’s assets. That’s because the trust owns the assets, so they are protected from creditors. The downside of an irrevocable trust is that it is irrevocable and cannot be canceled or changed. 

As you can imagine, your life circumstances can often change, so it’s essential to review your estate plan every few years, including wills, trusts, and other documents. While it’s not always necessary to change your plan, reviewing them regularly can help you evaluate finances, relationships, and family dynamics.