COVENANT BUSINESS PLANNING SOLUTIONS

Trusts – Your Child’s Inheritance

This is part of our ongoing blog series on business owners and passing wealth to your children.
Some parents link distributions to children to the child’s achievement of written standards contained in the trust. These standards can include: 
 
Earned Income. For example, if a child earns $60,000 annually in her employment, she would be entitled to receive an equal amount or some other percentage from the trust. 
Legal Activities. A parent may wish to distribute money to children who engage in (what the parent believes to be) socially useful activities: teacher in a public school, an artist, a writer, an Exit Planning Advisor.
Illegal Activities. Parents may forbid children from receiving any distributions they would otherwise be entitled to if convicted of a crime or addicted to an illegal substance. 
Existence of a Pre-Marital Agreement. Some parents require a child to enter into a premarital agreement before receiving any distributions from a trust. 
 
Imagination is the only limit on the variety of restrictions parents can place upon a child’s right to receive money. Keep in mind, however, that someone—the Trustee—needs to interpret, administer, invest, and make distributions according to the provisions of a trust. 
 
A parent’s choice of trustee is at least as important as the trust design. Space constraints prevent a full discussion of desirable trustee characteristics and attributes, but consider the following questions: 
What degree of discretion do you wish to give the Trustee to make distributions to children? 
How long will the trust last? 
What is the value of the trust assets? 
What type of asset is in the trust? If an operating business interest is to be owned by the trust, the choice of Trustee may well be different than if the trust is comprised of investment assets. 
Should the Trustee be a family member? 
Who will be entitled to remove the Trustee and for what, if any, reason? 
 
After determining the restrictions you want in place for our children, you can transfer the limited partnership interests or non-voting interests into each child’s trust. At this point the parent is making a gift of the value of the limited interest to the child. 
 
Unfortunately, parents with large estates often abandon the planning process at this stage because they believe they can only transfer their $10 million combined lifetime gift exemptions to children without incurring immediate tax consequences. As we’ll see in a moment, parents are often able to transfer as much wealth to children as they desire. 
 
The toughest question again arises: How much, when, and under what conditions should kids receive the money?