How To Protect Your Child With A Trust

Hi, there. My name is Bridget Mackay. I’m an attorney in Petaluma, California and I practice in the area of estate planning, and elder law. Today at my video blog, I want to talk about protecting your children in your trust. There are numerous ways to protect your children, both minor and adults. I’m going to start with minor children. The two main ways to protect your minor children in your estate plan would be to get a trust that would also include wills. Let me explain. A will is the only vehicle in which you can nominate someone to physically care for your child. If you just had a trust, in that trust, you couldn’t say, “If something were to happen to me, or me and my husband, I would like X to physically raise my child.” So, when you do get a trust, typically they include a will, often called “a pour-over will”. And in that will, it will convey physical guardianship of your child.

Now what about the finances? Something happens to you, and you know who you want to physically raise your child, but you may not be comfortable with the way that that person uses money or uses their assets or spends assets. Those directions can be given inside of the trust. In the trust, you will place all the money in a trust for your minor children, and appoint a trustee to manage that money. They will protect the assets, dole out the assets or the money to the kids for their education, welfare, health, generally sustain them until they’re old enough to financially manage those assets on their own. So those two documents together protect your children both physically and financially, and those two people that you appoint in those two roles don’t have to be the same person. You may think that your sister is the best person to care for your children, physically care for them, take them to school, they live with them. But you may not think she’s the best person to manage the money that you leave behind for them. And so you can appoint someone else in the trust to manage that money for them. And the two people, your sister and whoever you’ve appointed for the money management can work together to raise your children in your absence.

The second protection of your children would be for adults. So many of you may have adult children who are either not ready to inherit hundreds of thousands of dollars, or they have some actual special needs. They’re on maybe government entitlements, Medi-Cal, Section 8, SSI. In that case, you could build into your trust something called the “special needs trust”, which would financially take care of your child outside what they are already receiving from their entitlements, meaning their Section 8 housing, SSI and Medi-Cal for their medical. You can also build in a trust to your… In your main trust for your adult children to protect their assets in the event they divorce. In California, if you divorce, anything you’ve gotten from inheritance is considered separate property. If you’re a married person and you inherit money or someone gifts you money, that is your separate property. But oftentime, couples don’t know that, and they get $600,000 in a inheritance and they immediately put it in their joint bank account and six months later, a year later, five years later, 10 years later, there’s a divorce and those moneys will be presumed to be community property, and divided between your child and his/her ex-husband or wife.

One way to protect that in a trust is to have the inheritance to that child come into an asset protection trust, where when the trustee distributes out that $600,000, it goes into a marked account for just your child, for a trust for your child. Your child will have access to that money. They will be the trustee of that trust for them, and they will be the main beneficiary. So they can use that money at will. It just gives a definition that this is their separate property. You may have issues or a child who has issues with creditors, there’s a way to establish a creditor protection trust within your trust to protect those children. It would place that $600,000 of inheritance into the hands of the trustee and you can name who that trustee is, so that your child will be able to get those assets at the discretion of that trustee. In this way, if your child has IRS liens, a legal judgment or is subject to undue influence from others that you’re concerned about, or they manage money badly, or even things like gambling or drug addiction, so that you’re not comfortable having your child inherit that money outright, you can use this trust and place a manager of that money over it, so that the child cannot get assets unless the trustee approves it.

Do they have to live like that forever? If the IRS lien is cleared up, or they rehabilitate and are no longer drug-addicted or alcohol-addicted, you can also build what we call “incentives” into those trust, where you can say, “Once my son has cleaned up his IRS debt or is in recovery for five years, then those…

That trustee can release the remainder of his inheritance to him, outright.” Those are a few ways that you can use your living trust and wills or your estate plan, to protect your child from birth to death.