Our Attorneys Will Keep Your Children’s Future Needs at Heart
Ideally, a parent will be able to provide for their children from infancy to adulthood. Parenting is the process of providing encouragement and support for the child’s physical, emotional, social and intellectual development. Although statistically unlikely, parents with young children should establish a plan if this process is untimely interrupted by their deaths. A surviving parent of a minor child may appoint a guardian of a minor child by Will. A trust is the best means to provide for your young children’s financial needs. .
Appointing A Guardian For A Minor Child
For parents with minor children, the first estate planning consideration is to decide who would be the appropriate person to be the guardian of the children if neither parent survives. Under Maryland statute, a parent of a minor child may appoint one or more guardians in their Will and the person(s) so designated need not be approved by or qualify in any court. Because of the inherent power of the equity court, however, this statutory privilege is not absolute and the court always retains the power to intervene protect the minor’s best interests.
If there is a surviving parent, of course, that person will have the right to be guardian unless their parental rights have been terminated by a court. Occasionally a non-custodial parent with little or no contact with the child will not want to take on the responsibility of raising the child. Thus it is a best practice to always appoint a contingent guardian in those situations In most other cases, the person or persons named by the surviving parent to be guardian will, in fact, become the guardian. From a planning perspective, every parent ought to have a will designating who would become the guardian if neither parent is living or able to act.
A Trust Should Handle Assets For The Benefit Of Minor Children
A trust should be created to manage the financial resources of the parent or parents for the benefit of the children. Such trusts may be either testamentary (created as part of the will) or inter vivos (created separate from the will). In either case, the terms of the trust should be structured with the individual needs of each child in mind. If there is more than one child, often a trust (a “pot” trust—i.e. a single fund for multiple beneficiaries) will be created for the benefit of all of the children (at least initially). This mirrors how funds would be employed by parents for the benefit of their children to permit all assets to be used for the needs of each child instead of splitting those assets into separate shares for each child. The pot trust provides that the younger children will receive economic support that older children may have already received—for example, for education. Once all of the children become older, the trust fund may be separated into separate trusts for each child. Depending on the level and nature of the trust assets and the needs of the children, however, the general pattern may not work well. There is no one way that will be appropriate for all cases.
Considerations In Choosing a Trustee for Your Child
A critical decision is who should serve as trustee. Obviously, as the name implies the trustee should be trustworthy. The trustee invests and manages the assets and makes distributions in accordance with the terms of the trust for the benefit of the beneficiaries. If using individuals instead of a trust company or other professional trustee, it is generally a good practice to provide that two individuals serve concurrently as co-trustee. One of the trustees, of course, could also be the guardian. If professional management is warranted, trust companies or others can be appointed. If non-family members are serving as trustee, however, we recommend that a trusted advisor with a good understanding of the family be given the power to remove and replace the non-family trustee with another appropriate institutional or other third-party trustee. This is particularly important given the modern tendencies of banks and trust companies to merge, or otherwise change their identity and to assure that the trustee is a good fit for the beneficiary.
Give Flexibility To The Trustee In Making Discretionary Distributions
Generally it is a good practice to give the trustee flexibility in meeting the beneficiaries’ needs. Such flexibility permits the trustee to respond to future circumstances not contemplated by the deceased parent when designing the trust. The flexibility may be framed within a standard for making such distributions. A traditional trust standard to guide the trustee in making distributions is one for “health, education, maintenance and support” of the beneficiary (the “HEMS” standard). One benefit of using the HEMS standard is that it has been used in many trusts and accordingly there is a developed history of court interpretations of that standard under many different circumstances. This gives a predictability to the scope of the distribution standard.
How To Give Specific Direction To A Trustee
While it is important that a trustee be selected that the client has absolute confidence will exercise discretionary distributions for the benefit of the child, often a client wishes to give more specific direction to the trustee. The best practice is to structure this direction as a “precatory” direction (non-binding direction but suggestions) so that the trustee understands what is expected of them but still preserves the ability of the trustee to be flexible if the situation so dictates. Some clients are tempted to use the distribution standard in a trust as a way to promote, perhaps even compel, certain behaviors by the beneficiary. Such trusts might be designed to encourage certain positive behavior such as obtaining a college education or to encourage hard work. Other trusts are designed to discourage negative or self-destructive behavior by tying distributions to indications that the beneficiary is not engaging in such negative lifestyles or actions. These type of trusts are generally referred to as “incentive” trusts which may or may not achieve their objectives. Generally it is best to trust one’s trustee to promote positive achievements and to discourage negative lifestyles by the beneficiaries and set out broad precatory standards for distributions either in the trust document or in a side letter to the trustee. .
Encouraging Financial Responsibility By Trust Design
There is a technique, however, that we believe shows great promise. Most trusts cease at some point and the money will be distributed outright to the beneficiary. A common approach is to distribute the assets in two or more terminating distributions separated by several years. The theory is that if a beneficiary mishandles the first of those distributions then he or she will have “learned their lesson” before the second or additional distributions.
Another approach would be to set out a time when the beneficiary becomes in control of their own trust. In this scenario, a trusted advisor can exercise discretion to accelerate the time at which the beneficiary becomes in charge of his or her trust (e.g., the trust may say that the beneficiary takes control at age 35, but this can be accelerated to age 25). The trusted advisor, in turn, is given objective standards by which to gauge whether the beneficiary should come into control earlier than the outside date set in the trust document. This provides incentive to the beneficiary to attain those objective standards in order to gain control of their financial lives earlier rather than later. The objective standards are not usually educational or business achievement but whether the beneficiary has demonstrated he or she can handle money.
Another technique is to have the beneficiary become a co-trustee with input on managing the funds but not determining distributions. Once the beneficiary gains more experience, then the trust could be turned over to him or her. This provides something akin to an apprenticeship for the trust beneficiary before he or she becomes responsible for those decisions.
“Traditional “incentive trusts” are geared on doling out money if and when the child reaches a pre-determined milestone -obtaining a certain grade point average or earning a certain threshold income level. These standards test the wrong things. Ultimately you should be most concerned whether the child is able to handle money. By giving the child the ability to accelerate when they can gain direct control over their trust, you have created a strong incentive for the child to become financially responsible.”said, a principal of the Maryland estates and trusts law firm of Franke Beckett LLC.
Using Asset Protection Techniques In Children’s Trusts
While a trustee is managing a minor’s trust for the child, the discretionary nature of the trust protects the assets from creditors. Often we suggest structuring bequests to children in continuing trusts where the child, at some point, becomes her or his own trustee instead of the trust ending with a terminating distribution. Under the Maryland Trust Act, a beneficiary may be her/his own trustee and a “spendthrift” provision contained in the trust may still be respected. A spendthrift provision protects the trust assets from the claims from the creditors of the beneficiary. By this technique, the inheritance may be protected from a child’s professional liability judgments (if the child becomes a doctor, lawyer or other professional) and from the child’s possible creditors from business reversals or other potential hazards. It immunizes, in a different way and, perhaps to a somewhat lesser extent, claims against the inheritance due to the child’s potential divorce.
The Maryland estate and trust attorneys at Franke Beckett LLC understand how important it is to you to protect your children. For over 35 years, the law firm of Franke Beckett LLC has concentrated on the law of estates and trusts – including meeting the unique needs of clients with minor children and the special considerations that involves. Because we do it all within the niche of estates & trusts, our attorneys are continually applying lessons learned in our estate administration and litigation practices to our estate planning practice. This immersion in every aspect of the law of estates and trusts makes us well prepared to help you construct an estate plan that will protect you, your family, and your assets. In order to schedule a consultation with an experienced Maryland estate and trust attorney, call 410-263-4876 to get in touch with our Annapolis office.
