Some people are uncomfortable with the idea that their children will find out they are the beneficiary of a trust. After all, what parent wants their child turning into a trust fund baby. Stories abound of young people who waited for their trust money, spent it on a lifestyle they could not afford, and had nothing to show for it after the fact. Some will drop out of college and never hold a meaningful job. Others will develop substance issues. The results can be devastating.
Many former trust beneficiaries have told me they wish they had not known about their future inheritance. That their lives would have been different. They would have paid more attention in college and focused on a career if the prospect of inheriting millions of dollars was not in front of them.
Here are some considerations when setting up a trust for your children that may prevent these problems:
Consider a silent trust
Check if your state allows silent trusts
A handful of states allow you to create silent trusts. Delaware, New Hampshire and Nevada, for example, allow for the use of silent trusts. The vast majority of states require some form of notice to the trust beneficiaries. If you live in a state that allows for silent trusts, you can include that language in your trust.
Create a silent trust in another state if necessary
If you do not live in a state that allows for silent trusts, you can create a trust in a different state. However, you will need to use a trustee who is located in that state. Most people utilize the services of a trust company to serve as trustee to get around this requirement. The trust company will charge you to serve as trustee, which is usually based on their schedule of fees for assets under management.
If you are uncomfortable with the idea of a trust company serving as trustee because the trust company does not have a personal relationship with your family members, you may be able to add a “trust protector” or a “distribution advisor” to your trust. These roles can often be filled by a close friend or long-time family advisor who can be given the power to override the trustee. For instance, they can have the power to remove and replace the trust company as trustee or direct that distributions to a beneficiary are made or withheld.
Local counsel is often needed
Your local lawyer may not be licensed in the state where you want to establish your trust. If that is the case, you will often need to retain a local attorney in that state to either draft the trust or review it. This will increase your costs to set up the trust, but it may be worth it in the long run.
If you decide against the use of a silent trust, you can still avoid your children turning into trust fund babies. Consider drafting the trust to keep the assets in trust for the beneficiary’s lifetime with distributions completely in the discretion of the trustee, and do not give the beneficiary the right to withdraw the trust assets. You can also draft a letter to your trustee requesting that your children be rewarded for achieving certain milestones such as graduating college or purchasing their first home. Explain that you do not want your children living solely off the trust money. This statement of your intentions will guide the trustees in making distributions and help your children to lead meaningful and productive lives.
This article originally appeared on Forbes.
