Debunking A Common Myth In Estate Planning
If someone had given you $100,000.00 on your 18th birthday, no strings attached, what would you have done with the money? Would you have spent part of it on your college education, then saved the remaining money for a down payment on a house? More likely you would have thought “I’m rich!” Then you would have spent the money on essentials like a new fully loaded car, a vacation, new clothes, electronics, lifetime backstage passes to Dave Matthews concerts, etc., before realizing that $100,000.00 doesn’t get you quite as much as you thought.
In my continuing series on estate planning, I want to address one of the greatest misconceptions that people have: trusts are only for the very wealthy. Not only can a properly executed and funded trust make the administration of your estate easier when you pass away, but it can ensure that your children are provided for until they are truly adults.
In Ohio, any money left to a minor child in must be managed by a financial custodian or guardian until they turn 18. After their 18th birthday that financial custodian or guardian has no power to control the inheritance if the child demands control of the money. However, if you set up a trust to hold your assets that pass to your children upon your death, you can arrange to have the trustee control 100% of their inheritance until they reach some goal, such as college graduation. The trust can also call for distributions of portions of the trust upon certain birthdays or milestones (graduations, weddings, etc). When a trust is in place your child has no right to any money unless the request to the trustee complies with the circumstances that you designated. How is that for peace of mind?
Not convinced you have enough money to make a trust fund worthwhile? Let’s say you and your spouse each make $45,000.00 a year, and you have two children ages 1 and 3. You and your spouse made sure that you had wills done when your kids were born so you could designate their guardian and make sure they inherited whatever assets you had. You never considered setting up a trust for their benefit because after paying your bills (including the astronomical cost of daycare and diapers) you don’t have much money to put away in savings. However, let’s say each of you has a modest life insurance policy through work with a death benefit of five times your salary ($225,000.00 each). If something were to happen to both of you simultaneously your children would each inherit $225,000 on their 18th birthday (less whatever the guardian spent on their care while they were minors). Suddenly we are talking about a substantial amount of money that, if distributed wisely through a trust, can provide for them for life, or if spent on the “essentials” of an 18 year-old might not even cover a year of living expenses or a weekend in Vegas!
Rebecca Price is a mother of a 10 month old daughter and a member of a law firm.