What to Know About Conditional Gifts in a Trust

Leaving a legacy behind for your children or grandchildren and making sure your family is taken care of is one of the main reasons people start an estate plan and, in particular, a trust.

But even if you’re familiar with the basics of setting up a trust, you may not realize there are different ways to ensure your assets are distributed according to your wishes and in a way that reflects your values. Here’s what to know about leaving your children or grandchildren conditional gifts in a trust.

CHOOSE THE RIGHT TRUSTEE

Your trustee will be the person who oversees the financial management of the assets in your trust on behalf of your children or grandchildren, so it’s important that you’re choosing a successor trustee whom you feel has the judgment and skills to manage that responsibility. If the children are minors, the trustee can be the same person as their guardian, but they don’t have to be.

You can also choose a corporate trustee, which could be especially helpful if you have a complicated trust because a trust services provider would have easier access to tax, legal, accounting and other required experts. Just keep in mind that a trust company may have its own corporate rules and protocol to follow when making decisions for your trust.

THE KIDS DON’T HAVE TO RECEIVE ALL YOUR ASSETS AT ONCE

In many states, the legal age of majority (the age when children are recognized as adults) is 18 years old — but that doesn’t necessarily mean they’re mature enough to manage their own money.

“I know very few 18-year-olds who are equipped to handle a lump sum,” says Cheryl Borland, chair of the trust and estates practice at Griesing Law LLC. Even if your child or grandchild is mature, they’ll likely be unfamiliar with the basics of financial planning or the tax implications of different investments, adds Somita Basu, founding principal and partner at Norton Basu LLP.

If you’re concerned how your child or grandchild would handle a lump sum of funds, Basu says you can choose to distribute your assets in intervals over time. For example, you may choose to include language in your trust that entitles the child to distributions of interest generated by your estate assets at the age of 18, and then allow distribution of the trust principal in a tiered payout at ages 21, 25 and 30. You could also give your trustee the ability to draw additional funds for specific life events, such as college tuition, a wedding or a down payment on a home.

Boland says you could also include language that gives your trustee some leeway for extras that they deem appropriate So while a car might fit the bill, you might choose to make sure it’s one that your trustee approves to be safe, rather than a sports car.

YOU CAN INCORPORATE VALUES-BASED CONDITIONS INTO YOUR TRUST

It’s perfectly acceptable to put conditions in place for the distribution of your funds if your child or grandchild has exhibited behavior that does not align with your values, Basu says. The key, however, is to balance your specific wishes with what’s realistic for your trustee to carry out.

For instance, if you require the beneficiary of your trust to hold a steady job before receiving any money, the onus will be on your trustee to verify their employment. Or, if you mandate that they undergo regular drug testing, your trustee will have to keep tabs on that as well. While you can add these kinds of parameters, Basu cautions that having such overly specific language places a big burden on your trustee. “Have an honest and open discussion with your attorney on what is legally possible and what is practically feasible,” she suggests.

Of course, if you're creating your estate plan early on in a child’s life, “it’s impossible to guess what they might be like as adults, which can make it hard to plan for what might appear to be ‘worst-case scenarios,’” Borland says. But that doesn’t mean you shouldn’t think through some of these possibilities. Borland recommends adding guard rails into your documents to cover your bases. “Look at the provisions as something that’s there if needed and, if not, then no big deal,” she says.

IF YOU’RE SPLITTING ASSETS UNEQUALLY, YOU CAN EXPLAIN WHY

If you have more than one child or grandchild, there are plenty of reasons why you may not want to dole out your estate equally, or why you may want to exclude one from inheriting any assets. Maybe one has acted as a caretaker for you, you might be estranged from one of them, or one of them simply needs the money more.

While it’s your prerogative to direct your money as you see fit, it’s important to remember that dividing your estate unequally could lead to dissension among siblings, which your trustee will have to deal with. Be sure you’ve fully considered if the potential damage is worth it.

If you do decide to proceed with unequal distributions, Borland recommends adding a no-contest clause, with a straightforward explanation: “While I recognize Susie as my daughter, I have not provided for her in the will because I supported her during my lifetime, and therefore I am dis-including her from distribution and beneficiary designation.” By making your intentions clear in the documents or your attorney’s notes, this will make it harder, if not impossible, for someone to challenge it, she adds.

If you plan to distribute your trust assets unequally due to less contentious reasons, such as your children or grandchildren having drastically different incomes, Basu recommends having a frank discussion with them with your estate planning attorney present.

“This can help to assuage hurt feelings and misunderstandings after you pass away,” she says. “Your children will be glad you did, and you will know that you have done everything you can to explain your intentions and avoid later confrontations between your kids.”

Of course, these are just a few of the scenarios you might face, and Borland emphasizes the importance of working with an experienced attorney who can help ask the tough questions and give guidance. “You’re not necessarily paying for the time spent drafting the documents, but the communication to really get to the root of the needs,” she says. “The value is in the education about where your family is now and where they might be.”

This publication is not intended as legal advice. Financial Representatives do not render legal advice. Consult with a legal professional for advice that is specific to your situation.