You’re passing some of your assets directly on to your adult children, but you don’t want to give grandchildren the same freedom. Many of them are still minors, and you think the responsibility is too great. For instance, you may have $50,000 that you’d love to use to provide for one of your grandkids, but he’s only 13 and you by no means think leaving $50,000 to a teen is a wise move. If so, you may want to consider a trust, which gives you control over:
1. Types of spending.
Maybe you want the grandkids to use the money only for their education. You know how much you valued your college experience, and you want to give the same thing to them. A trust can be set up so that money can only be used for certain things, ensuring that what you leave behind is actually utilized as you intended.
2. When money pays out.
Another common tactic is to have the trust only pay out when the child reaches a specific age. You’re worried about that teen burning through the money, but you know he’ll likely need it for a home or to start a business at 30. The trust is waiting to offer a financial boost when it’s needed most.
3. Whether or not you want to withhold the money.
There may be certain circumstances under which you don’t want the trust to pay out at all. For example, if the grandchild ends up not going to college and you wanted the money to go toward education, you could say that the money should instead go to a charity – perhaps one that offers college scholarships.
4. Incentives for the grandchildren.
An incentive trust can give your grandchildren a goal and pay out if they meet it. For instance, some trusts pay out the same amount that the person earns in a year, encouraging him or her to keep working hard. You could also tie it to other life goals, like offering the grandchild a payout upon college graduation. Knowing that $50,000 is coming after graduation can keep a child in the classroom, working hard, when he or she was considering giving up.
You can also combine some of these things, setting up multiple trusts or putting in multiple provisions. For instance, maybe you like the idea of an incentive trust to make sure the grandchild graduates from college, but you don’t want that money to just go to student loan debt. You can set up an educational trust to provide tuition money and an incentive trust on top of that.
As you can see, trusts are flexible and help pass money and assets on to the next generations. Be sure you know all of the things they can do and the options they provide as you do your estate planning.