What Are the Pros and Cons of Holding Property in a Trust for Children?
Upon your death, you have many options on how to leave assets to your loved ones. Most people understand that you can leave your assets “outright” to your children (or other loved ones), or you can leave them “in trust.” Leaving assets “in trust” can be complicated so it is important to understand the pros and cons of holding property in an on-going trust for children.
5 Advantages of Holding Property in a Trust
It’s important to determine whether or not it would be prudent to leave your inheritance to your children in trust or outright. Of course, there are many factors to consider, such as the needs of the beneficiary and the amount of wealth being transferred. However, below are the basic advantages of leaving your assets in an on-going trust for your beneficiaries.
(1) Protect Your Inheritance
The primary reason for leaving assets in trust for your loved ones is generally to protect them from themselves. They could be young or financially immature. Creating a trust is an ideal option for grantors who want to keep their children or grandchildren from squandering their assets
Further, many grantors would then say that the assets should be held in trust until the child reaches a certain age, like 30 years old. However, by continuing to hold the property in trust (where the child could also serve as their own trustee), you can also make sure that their inheritance is creditor or predator protected. So if your child is sued or is going through a divorce, the assets you leave them in trust are protected from those creditors or soon-to-be ex-spouse.
(2) Avoid Probate
Not only can you make sure that your estate avoids probate on your death, but you can also have the assets continue in trust for multiple generations so that the property continues to avoid probate.
(3) Avoid Guardianship
When creating a Trust, for your children, if they become disabled or incapacitated, they assets are still held in trust for their benefit so there is someone ready to manage the assets for their benefit. This way, your family avoids needing to go to Court to have a guardian appointed to manage the assets for your loved ones.
(4) Contesting a Trust is Difficult
It is not uncommon for Wills to be contested by beneficiaries or disinherited family members. This is because Wills are probated through a public court process, which is very easy to contest because a case is already opened with the Court. On the other hand, trusts are administered privately and outside of the Court system.
(5) Preserve Privacy
Similar to above, trusts are administered outside of the probate system and privately. So if you have confidential or sensitive information that you’d prefer not be public record, it is much more prudent to keep those assets in an on-going trust for financial privacy protection.
3 Disadvantages of Holding Property in a Trust
While leaving assets in trust for your children has its advantages, there are also several disadvantages to consider.
(1) Creating a Trust Requires Legal Help
When you are leaving assets in an on-going trusts for children, it can quickly become complex depending on the types of assets that you have. If you are like most families with a qualified retirement plan, it is extremely important to hire an estate planning attorney to assist with “funding” the trust. Of course, because of this complexity, it can also be more costly to set-up this type of plan.
(2) Extra Tax Returns
When you create a subtrust for a child, it is separate from your child for income tax purposes. Therefore, each tax year, the child will need to make sure to file a separate tax return for the trust, called a Form 1041. If all the income is distributed to the beneficiary during the tax year, no tax may be due. However, the return would still need to be filed while the trust is in existence.
(3) Limitations on trust distributions
Because the on-going trusts for your beneficiary may be creditor/predator protected, the child may be limited on how they can take distributions from the trust. It is important to discuss with your attorney what types of distributions you would want your loved one to take from their trust.
In order to determine whether or not you should hold property in a Trust for your children, it is advised to consult with an experienced St. Petersburg estate planning attorney. You can contact our attorneys at Legacy Protection Lawyers, LLP, to review your particular situation at 727-471-5868 for a case review.