What's the best way to leave assets to children?

For most families, deciding how to leave assets to their children involves choosing among the options surrounding two basic alternatives: leave assets outright or place them in trust.

Understanding which option is right for you requires careful thought about your goals and family circumstances. Consider these points as you review whether a trust may be right for your family.

Start with your current circumstances

When approaching your estate plan, it can be easy to fall into the trap of trying to guess what the future will look like. The better approach is to keep it simple and focus on your circumstances today.

Focus on your current assets and the current life stages of your beneficiaries. Are your beneficiaries minors? Are there any special circumstances or needs surrounding a beneficiary’s care or oversight? If your answer to either of these questions is yes, a trust is likely to make sense to ensure assets are properly managed and protected for your beneficiary.

How large is your estate? How much do you plan to leave to your children and other beneficiaries? Do you have a family business, art collections, real property or other assets that require special attention? In these circumstances, a trust can help set up specific management plans for your assets, provide tax benefits and give your beneficiaries time to adjust to having assets held for them.

If you have a straightforward estate and mature adult children, leaving assets outright to them might be appropriate. However, if you have a large estate or a more complicated family picture, it’s more likely you’ll want to leave assets in a trust to better manage and control the distribution over time.

How do you know if a trust is right for you?

If you’re uncertain whether to leave assets in trust for your children, ask yourself if any or all of these issues may apply to your situation:

Tax mitigation?– If your beneficiaries’ estates might be subject to estate taxes, leaving assets in trusts can be a way to mitigate those taxes. Under current rules, an estate will be subject to federal estate tax if it exceeds the exemption amount of $13.61 million per person ($27.22 million for a married couple). But the exemption is scheduled to be cut in half in 2026 unless new legislation is passed.

Control over distributions?– When you create a trust, you establish guidelines to be met under the stewardship of the trustee. These guidelines will dictate exactly how, when and to whom assets are distributed. This allows you to time distributions to ensure maturity and responsible use of the assets. For example, the trust can specify that assets are to be distributed to beneficiaries when they reach specified ages. You can also direct assets for specific purposes, such as education, a down payment for a home, or financing of a new business. You can create different rules for the distribution of income and of principal. You also can leave distributions to the discretion of the trustee.

Asset protection?– Because distributions from a trust are controlled by the trustee, assets held in trust are generally protected from a beneficiary’s creditors. This can include protection from an ex-spouse following a divorce.

Professional guidance?– Your trust can be overseen by an independent trustee, appointed by you, who will manage the trust, oversee investments, ensure proper accounting and tax filings and guide the disposition of assets over time. The trustee also can provide general professional guidance and assist the beneficiary with financial decisions.

Add instructions for the future

If you decide to leave assets in trust, your next decision is to determine the language you want to apply to the trust. For large estates, it often makes sense for a trust to exist for multiple generations to maximize the tax benefits. In other cases, it may make sense for a trust to terminate when a child reaches a certain age. You can also have a portion of the trust assets be distributed at a series of ages – for example, a third at age 30, half of the balance at age 35 and the remaining balance at age 40.

If you decide a child’s trust should exist as long as possible, you may want to insert language that allows the beneficiary to become a co-trustee at a certain age. In this role they can work with your professional trustee, gaining an understanding of how assets are managed and how future distributions are planned. This may set them up to become sole trustee in the future.

You might also consider building in the right for your beneficiaries to remove or replace the trustee, or the right to appoint successor trustees. These provisions are a different way of balancing the benefits of a trust while allowing the beneficiary some form of control.

The tax implications of rights granted to beneficiaries always need to be closely evaluated. But there are a wide variety of options to develop an arrangement that makes sense for your family.

Consider the context and benefits

Passing assets outright to your children is often viewed as a direct and simple solution. But finding the right path for your family deserves careful consideration of your circumstances. Leaving assets in trust can provide long-term benefits, control and peace of mind. At Fiduciary Trust, our advisors are always available to help you make the right decisions in the context of your goals and financial circumstances.

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