One of the best ways to ensure your assets are allocated as you wish upon your death is to create a will.  Wills specify how your assets will be split among friends and family, but additional measures are sometimes necessary.  For example, you may not want to leave a large sum of money to minors who are either too young to understand the concept of money or have demonstrated that they are not financially responsible.  This is where trusts can be beneficial.

Trusts that are created based on instructions detailed in a will are called testamentary trusts.  These trusts are perfect for those who want to pass their wealth to their children, but are concerned with the beneficiary getting the money before they are financially responsible.  In a testamentary trust, the assets are left to a trustee that you designate until the terms of your will are met.  Once all of the terms detailed in your will are met, the trustee transfers the assets to the beneficiary.

A trust may also have a designated custodian that is responsible for managing the distributions made to care for the child while still a minor. Generally, it is a good idea to designate a separate trustee and custodian because it provides a separation of power.  If one person is designated as both, this person maintains all of the control.

Perhaps the greatest benefit provided by a trust is that you can determine when the money is available to the beneficiary.  There are several stipulations that can be placed on the trust.  Typically, the assets are transferred to a beneficiary at the age of 18, 21, or 25.  You can also have the assets distributed in increments to ensure it is not all spent at one time. Additional stipulations can be made such as establishing that funds are paid when the beneficiary graduates college, gets married, etc.

If you want to avoid the gift tax, you could use a 2053(c) trust, which is a special type of minor’s trust that avoids the gift tax altogether. However, the downside to this is that all of the funds must be distributed to the minor by the age of 21. That means that this trust wouldn’t necessarily be a good option if you wish to distribute the funds incrementally until the beneficiary reaches the age of, say, 25 or older.

If you are considering a trust, we recommend scheduling a time to discuss your specific scenario with us.  Please feel free to contact us at any time at info@miles-tax.com or 410-685-1406.