Protecting Assets for (and from!) Adult Children

Although it may be hard to imagine today, someday your young children will grow to be young adults, ready to take on the world. If something should happen to you and your children’s other parent, you may want to protect the assets you leave for them from their own youthful exuberance. Through estate planning, you can leave assets for your children in a way that will make funds available for their use, as you specify, without leaving the assets exposed to your children’s creditors and/or ex-spouses.

First, we start with the fact that even a modest estate can grow to a sizeable sum over a period of years through the power of careful investment and the time value of money. For example, consider a couple with a $1 million life insurance policy, $300,000 in equity in their home, $20,000 in cash and investments, and a $500,000 401(k) plan. This couple may not feel wealthy due to the fact that the equity in their home, their life insurance, and their retirement plan do not contribute to their current disposable income. However, if they leave their assets to their children through a will, then upon their deaths their children would inherit perhaps $1.7 million, after expenses. Invested wisely, this sum would easily support the children throughout their childhood and could grow substantially by the time the children reached the age of 18. Unless otherwise provided in the parents’ wills, each child’s share of this inheritance would be available to them on their 18th birthday. Unfortunately, it is impossible for us as parents to foresee if our children will have the wisdom and foresight to responsibly manage a substantial sum of money at such a young age.

Fortunately, through prudent estate planning we can use a trust to hold inherited assets for children until they are old enough to responsibly manage the assets themselves. Typically, parents provide in the family trust created during their lives that upon the death of the surviving parent, each child’s share of the trust funds will be held in trust for that child. The trustee can be given discretion to make distributions to, or for the benefit of, the child for his or her health, support, and education. Because the distributions are discretionary, the trustee can refrain from making distributions if the distribution would be subject to attachment by a judgment creditor should the child be sued. Funds held in trust would also not be subject to a property division upon divorce. The trust terms can also provide a schedule for distribution of the trust principal; for instance, 1/3 at age 25, 1/3 at age 30, and the balance at age 35. As the child matures, during their lives the parents can amend the terms of the child’s trust to more accurately address the abilities and anticipated needs of that child. Although often people associate trusts with tax planning, even parents with modest estates should consider establishing a trust to provide maximum asset protection for their children.

Back to Top