Wouldn’t it be great if all of our families lived in complete harmony, without discord, like something straight out of a Norman Rockwell painting? Now enter reality. Families are messy, and so are family dynamics. And as with anything in real life, there’s often conflict.
As parents, we always strive to do the best that we can. But our kids can make choices we don’t agree with or don’t understand. Maybe they’re on the fence about college and moving from job to job. Or perhaps they’ve finished college but have taken on too much debt and are already siphoning your savings. Many times, the last thing you want to do is write your child a blank check. So, how do you support your children without enabling their bad habits?
Personally, in my family planning, my children won’t receive any assets until they hit age 30. And even then, the assets will be distributed to them slowly over years. My reasoning (though it may be controversial) is that you aren’t “fully baked” into adulthood until you reach age 30. Some may say this is too early or too late, but this is my opinion on when we mature financially, for the most part. Plus, even your most responsible children will benefit from not receiving a big chunk of money too early.
If you want to provide for your children, but would prefer not to write them a check outright, consider these other ways to give as obtained from Bob Carlson.
TRUSTS
I’m a big fan of trust planning because trusts are drafted at the explicit direction of the property owner. Creating a trust is a truly empowering endeavor since the law provides us the opportunity to outline our wishes for our wealth. Drafting a trust is like a blank slate for you to creatively figure out how you would like your assets to be distributed to your kids.
In its simplest definition, a trust is an account with instructions. Unlike regular accounts, you can’t simply withdraw money from a trust as you wish. There are guidelines and rules as to how the money will be used and distributed.
What’s more, the person that the money is intended for, called the beneficiary, isn’t the one calling the shots. It’s the manager of the account, called the trustee, who’s in charge of deciding when and how to use the money. The terms of the trust writing are their guidelines.
Some of the provisions you can write into a trust include the following:
Discretionary Clause
If you include this clause in your child’s trust, you want to choose a trustee you know and, er, trust. That’s because this clause gives the trustee broad discretion over making payments to the beneficiary. And, these payments can be from the interest or principal (called the “corpus”) of the trust.
Under this type of clause, the trustee has wide latitude in choosing the amount and timing of all payments. Consider this provision if the trustee knows your values and wishes well. It’s all the better if you provide written guidelines for them to follow.
Spendthrift Clause
This clause is very popular. So many families have a “spendthrift” child or a kid who goes through money hand over fist, making this provision a must. The clause says that creditors of the beneficiary can’t force payouts from the trust. Instead, the money remains protected in the trust. This point is true even if the beneficiary is bankrupt. It’s only after distributions are paid to the beneficiary that creditors can try to stake their claim.
Note that some states don’t allow spendthrift clauses, plus many that do limit the clause to around $500,000 of the trust’s value. Talk to your financial advisor and estate planner to see what the rules in your state are.
Milestone provisions
Think of milestone provisions as steppingstones. Trusts with these provisions start by paying the beneficiary only income. There may be an annual limit to the income payment. Or, payments could be reserved to pay only for certain expenses, like education and medical care.
Once certain milestones are met, the beneficiary receives additional income or perhaps principal distributions. These milestones could include reaching a certain age, graduating from college or being employed for a certain number of years.
You set the steppingstones for these provisions. You could direct the trustee to distribute the entire corpus when the beneficiary has reached one milestone, or you could have the trust paid out at stages as different milestones are reached.
Milestone provisions are a fantastic way for the beneficiary to learn how to handle money, and to encourage them to create useful and productive lives. They’re a great way to let your children mature before receiving the bulk of your wealth.
Emergency clause
These are similar to discretionary clauses, but with a different spin. Here, the trust would initially pay income and principal to the beneficiary under a schedule. If, however, the trustee considers it to be in the best interests of the beneficiary, he or she can decide not to make distributions. Some folks spell out the circumstances in which this is allowed, while others grant the trustee broad powers to decide on their own. Regular payments begin again once the emergency is resolved and the trustee believes distributions are in the beneficiary’s best interest again.
Gifts
Another vehicle for sharing and protecting your wealth at the same time is to make indirect gifts. These are a win-win for your adult child and you – they get the benefit of the gift, and you get to shed some wealth to avoid a pesky estate tax.
For 2019 and 2020, you can make up to $15,000 in gifts tax-free. Spouses can give jointly up to $30,000 per recipient. Fortunately, you don’t have to provide the money or property outright. Instead, you can do things like pay bills for a problem child, buy a car or a new computer for him or her, pay for family vacations or other similar gifts. Remember, when you directly pay for qualified education or medical expenses, these are considered tax-free gifts, and the amount is unlimited.
Custodial Accounts
While your child is still a minor, you can put money or property into a custodial account, known as either a Uniform Gift to Minors Act (UGMA) or Uniform Trust to Minors Act (UTMA) account. These gifts do qualify for the annual gift tax exclusion. In these accounts, an adult is in charge only until the child reaches the age of majority (usually 18), at which point the money is theirs. So, you may want to consider your trust options, too.
Family Limited Partnerships (FLP)
The FLP came to fame as a way to remove assets from an estate at a reduced gift tax cost. But FLPs have many other benefits. Dealing with an irresponsible adult child is one of them. Put assets into an FLP and then give each of your children limited shares. You and your spouse remain the general partners, so you ultimately control what happens with the assets; you manage and decide on distributions from the partnership.
The problem child retains an ownership share, but he or she can’t do much with it without your agreement. So, FLPs are a way to avoid misuse of assets and hopefully, to teach the child to be more financially responsible by becoming involved in the decision-making process. Over the long term, you want to establish someone to be the general partner after you and your spouse. Otherwise, the property might not be protected after your lifetime.
When crafting a way to care for your family during your lifetime and beyond, a little planning can help you financially support your children without enabling them. And, with a smart strategy in place, you can feel secure about your gifts or bequests without worry that your hard-earned money will be squandered.
With the above strategies, you can “solve” the problem child in your family. Of course, there are no guarantees that some of your money won’t somehow be wasted. But, if you want to set your child (and your assets) up for success, this type of planning could help you achieve both goals. Be sure to work with an estate attorney to determine what best makes sense for you and your family.
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