For many families, the primary motivation for building wealth and leaving a legacy are their children. They would want their children to have everything they did not have when they themselves were young. Building generational wealth, ending generational poverty – these are pretty compelling catchphrases for many people looking to create their own estate plan.
If you were a parent looking to secure your child’s future, it may not be enough to ask yourself whether you are providing for their needs and are leaving them sufficient wealth so they would not have to struggle as you did, should you no longer be there whey they grow up.
Another question you should ask yourself is whether you are leaving them with sufficient wealth and suitable safeguards so that they don’t squander their inheritance before they are ready to manage it with maturity and discipline.
To be Wealthy at 18?
The reality is that in California, if no such “safeguards” are in place, the default rule is that once a child reaches legal age, they may obtain complete control over assets left for their benefit.
If the child’s parents pass away while the child is still a minor, a person is generally appointed to manage their assets, whether through a court-appointed guardian of the estate, a trustee, or a custodian under CUTMA. In any case, this would be a fiduciary tasked with managing the assets inherited by the minor.
However, once the child turns 18, these fiduciary arrangements generally terminate and the assets are distributable directly to the young adult. He or she is now of legal age, which means that he or she has the capacity to enter into contracts, take control of his finances, and make legally binding decisions.
Most parents would be of the opinion that 18 years of age is far too young to bear such responsibility. Even with the best of intentions, a young adult can make mistakes, trust the wrong people, and potentially spend the bulk of their inheritance quite quickly.
For parents looking to safeguard their children’s future, it may not be enough to trust that their child will know enough to make the right decision. Young adults, especially at 18 years of age, don’t always make the best decisions. They would still be wanting for guidance and mentorship.
But how can parents ensure that their children get such guidance and support when they are no longer there?
A Specialized Subtrust and the HEMS Standard
A trust is not one-size-fits-all. Within the broader umbrella of a living trust a family trust lawyer can also create a specialized subtrust that will “activate” or trigger under certain conditions.
For instance, when the grantor passes away, certain “instructions” also kick in for the trustee. It may be something as simple as delaying the full distribution of the trust assets to the beneficiary until certain conditions are met: they turn 25 or 30 years old, they get a degree, or they get married. Or distributions can be done partially throughout the beneficiary’s lifetime as certain life changes are met.
How these “rules” for the trust are to be designed rests entirely upon the grantor/parent, how well they know their children, how they would like to implement the guardrails to make the trust assets sustainable over the lifetime of their beneficiaries, and based upon the family trust lawyer’s experience and recommendations.
Lawyers in the industry often recommend a variety of tools when creating a family trust, and this includes the HEMS Standard to protect the grantor’s children.
One such tool is known as the HEMS Standard, which stands for:
- H – health
- E – education
- M – maintenance
- S – support
The HEMS Standard is a distribution guideline for trusts. If the death of the grantor triggers a specialized subtrust so that distribution of the trust assets are postponed until certain conditions are met, the authority of the trustee may be limited to making distributions from the trust assets only for health, education, maintenance and support.
The practical effect of this is that you are ensuring the long-term financial health of your children by having them wait for final distribution until they are ready, while at the same time ensuring that they will not be left wanting in the meantime.
Health, education, maintenance and support – these are basic needs for most beneficiaries, and the HEMS Standard allows the trustee to take care of these needs for the benefit of the child, even while operating under a subtrust that delays distribution of the trust assets.
The Special Needs Trust (SNTs)
If your child requires more specialized care and oversight, your family trust lawyer can help design a Specialized Needs Trust or SNT for the benefit of your dependent.
This is yet another tool family trust lawyers use to facilitate the long-term care of a child whose parents have passed away, but who requires long-term or specialized care.
The primary benefit of an SNT is that it allows the beneficiary to periodically receive funds from the trust, while at the same time potentially preserving their eligibility for government benefits including as Medicaid, subject to the applicable requirements.
The California Uniform Transfers to Minors Act (CUTMA)
For more modest estates that might not require the added cost of trust creation and administration, the CUTMA offers a viable alternative to transferring assets through the trust.
Under CUTMA, a custodian may be tasked with managing the finances for a minor or dependent until the custodianship terminates. The custodian holds and manages the CUTMA account for the minor beneficiary, with authority to use funds to take care of the child.
Setting up a CUTMA account dispenses with the need to create a formal trust, though customization may be limited. That is, the parent may not set conditions or identify triggers for distribution in the same manner as a trust. A CUTMA account also does not provide the broader estate-planning features used in many comprehensive living trusts. The CUTMA is essentially a custodial account upon which the custodian may draw for purposes such as the child’s education, medical, and other personal expenses.
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If you are looking for a way to care for, support, and guide your children long after you are gone, consider speaking with an experienced family trust lawyer about whether a living trust may be the right solution for your family’s needs and goals.