A common question in estate planning is determining the appropriate time for children to have access to their inheritance.
Wealth Advisor’s article asks, “When Should Children Have Access To Their Inheritances?” The article looks primarily at distributions from trusts created by a will (testamentary trusts). However, these considerations also apply to trusts created during your lifetime, which are called inter-vivos trusts.
One big difference between your will and lifetime irrevocable trusts, is that during your lifetime, your will can be updated and changed. However, amending or changing, a lifetime irrevocable trust is much more difficult. Usually it requires a statutory solution (decanting) or permission from the courts.
Distributions can be discretionary, mandatory or event-driven. A common distribution structure includes mandatory distributions at specified ages, such as at 25, 30, and 35. A third of the principle is distributed at age 25, with half of the balance doled out at age 30, and the remaining balance distributed at age 35.
In addition to mandatory distributions, a trust can provide that the trustee has the authority to make either fully discretionary distributions or distributions under some “ascertainable standard,” such as for the beneficiary’s health, education, maintenance, and support. However, detailing only mandatory distributions or event-based distributions significantly reduces the fiduciary’s flexibility.
A trust should be created with the help of an experienced estate planning attorney. He or she will help guide your decisions about trust distributions, that include both the principal and the income generated by that principal.
In many situations, when an estate plan is designed, you may not be sure of the ultimate size of your children’s inheritance. In that case, your attorney can help you plan for an income stream in today’s dollars, as well as a cost of living adjustment to account for inflation. This will eliminate any mandatory income distributions that may mean large distributions to children at relatively young ages.
Another way to go is to leave the income distributions to the discretion of the trustee. With more flexibility for the fiduciary, distributions can be made based on what your heirs need at that time.
Reference: Wealth Advisor (July 30, 2018) “When Should Children Have Access To Their Inheritances?”