Many of us dream that our children will be responsible enough to handle their inheritance. But the reality is that many children and young adults are not quite ready for the pressures and responsibilities that come with inheriting wealth (especially at the early age of 18, which is what may happen if you do not have a Will).
There is a way for you to use wealth as a positive motivator, monetarily rewarding your children for their achievements – it’s known informally as an Incentive Trust. This type of trust can be an effective tool for promoting academic success and reinforcing the values that matter to your family.
Motivating Positive Behavior – An Incentive Trust allows you to reward your children for desired behaviors, while limiting access for undesirable behavior.
Age Restrictions – Restrictions related to your child’s age are often attached to trusts. You may not want your child to receive income or principal from the trust until he or she reaches a more mature age, such as 25, 30 or whatever you decide. You can also plan for distributions of funds to be staggered over time, at various “benchmark” ages, to help your child learn how to manage money responsibly. At the very least, this strategy eliminates the possibility of your child spending or giving away his or her inheritance all at once.
Encouraging Education – Trust distributions can be contingent on your son or daughter graduating from high school, achieving certain grade point averages or obtaining a postsecondary degree. You could also decide to distribute a portion of funds after successful semesters or academic years as a positive motivating tool.
Promoting a Healthy Lifestyle – Some parents will establish trusts that won’t pay out money if the beneficiary indulges in destructive and/or illegal behavior such as smoking, using illegal drugs or abusing alcohol.
Endorsing Philanthropy – You can help your child develop an appreciation for volunteerism and community involvement.
Key Considerations:
If you decide to add an Incentive Trust to your Will, you should use great care when drafting the necessary documents; make sure they allow a degree of flexibility to accommodate changing circumstances and unintended effects.
IRREVOCABLE LIFE INSURANCE TRUSTS
One of the most common assets for couples is life insurance. Unfortunately, there is some confusion about the tax implications regarding its ownership. Yes, life insurance proceeds are tax free to the recipient. However, life insurance is included in your gross estate for estate tax purposes. If you own larger life insurance policies, you should consider using an irrevocable life insurance trust (ILIT). Life insurance trusts are primarily used to generate estate tax savings. In addition, life insurance trusts create vehicles for investing and managing the proceeds of life insurance policies for the benefit of your family.
Generally, the proceeds of life insurance are includable in the insured’s gross estate if the insurance proceeds are payable to the insured’s estate or if the insured possessed any “incidents of ownership” in the policy, exercisable either alone or in conjunction with another. The term “incidents of ownership,” for tax purposes, includes any power to revoke the trust or change the beneficiaries. To avoid the inclusion of the proceeds in your estate, the ILIT is drafted to effect a complete divestment of the owner’s rights in the policy.
Planning for your 18 year old.
Is your child about to become an “adult” in the eyes of the law?
Once a child turns 18, parents lose the legal ability to make decisions for their child or even to find out basic information.
Learning you cannot see your college student’s grades without his/her permission can be mildly frustrating. But a medical emergency can take this frustration to a completely different level. Parents may have to go to court and ask for permission to obtain information about the student’s medical condition, be able to make decisions about treatment, and have access to the student’s financial records and accounts, if there are any.
The following legal documents allow anyone, including a young adult, to name another person to make medical and financial decisions if someone is unable to make them for themselves. The person(s) selected should be someone the young adult knows and trusts, and a candid discussion should occur now so they know what their wishes would be. These documents are not expensive, and everyone over the age of 18 should have them.
Parents may want to set an appointment with their attorney just after their child’s 18th birthday and encourage other parents to do the same for their young adults. Having these documents in place does not mean anyone expects to use them, but everyone will be glad to have them should they be needed.
Advanced Health Care Directive – Before your child enrolls in college, he or she should sign an Advanced Health Care Directive. This document designates a health care agent who is in charge in the event an adult student is unable to make his or her own health care decisions in a medical emergency.
HIPAA Release – This document gives parents immediate access to their students’ medical records.
Durable Power of Attorney – Before he or she enrolls at college, have your son or daughter sign a Durable Power of Attorney permitting you to make decisions for him or her regarding all accounts, vehicles, insurance and other financial affairs in the event he or she is incapacitated.
Bank Accounts – Those held by your college-age children should list you, the parent, as a cosigner or payable-on-death beneficiary.
If your child is college bound and/or celebrating their 18th birthday PLEASE, protect their health and finances with proper legal power(s) of attorney(s).