A trust is a key tool for asset protection, and no one needs asset protection more than the young. Trusts are not only for the children of the wealthy. They can help you set aside money for an uncertain future and put your children’s dreams within reach. They are private, unlike wills, which make property a matter of public record. And unlike wills or inheritances, trusts can operate continually during your lifetime and after your death, avoiding problematic delays with resources tied up in probate court.
But how do trusts work? And what do you need to set one up for your children? It’s important to know what is permitted in your state, as each state government sets its own trust laws. Our office creates trusts and plans estates in Georgia.
The Basics: Creating Trusts
Someone who wants to create a trust is called a trustmaker. They draw up a trust instrument—a document containing the terms of the trust—and give the trust property to one or more trustees. That trust property may be money, physical assets, real estate, or almost any other kind of property. The trustees hold it on behalf of the people that the trust instrument names: the beneficiaries.
There are four main types of trust. Every trust is either a living trust, made during a trustmaker’s lifetime, or a testamentary trust, which is created by the terms of the trustmaker’s will. Additionally, every trust is either revocable or irrevocable. When a trustmaker reserves the power to modify or dissolve a trust, that is a revocable trust. Unless the trust instrument specifies otherwise, a trust in Georgia is assumed to be irrevocable.
The trust instrument specifies how the trust property should be handled. Trustees may make payments to the beneficiaries or on their behalf, according to the terms of the trust. A trust can specify that payments only ever go directly to another party—for example, to a school for a child’s tuition—or for a particular purpose. Alternatively, the terms can specify that children get direct payments from the trust once they reach a certain age or on some other condition.
Goals for Your Child and Your Assets
What do you want a trust to accomplish for your child or children? That will be your first question. There are many different kinds of trust that families use to provide for children’s futures, including:
- The 2503(c) minor’s trust. This allows for a considerable transfer of wealth to a minor child without incurring estate or gift taxes. For a minor’s trust, IRS rules allow a trustmaker to make a yearly transfer of an excluded amount up to $17,000 (as of 2023) that will not be subject to gift tax. To qualify, the trust must follow certain rules. For example, when the minor beneficiary reaches 21, the trust must be dissolved and they have to receive the remaining assets. In the meantime, however, the trustee may use the money on the minor’s behalf to pay for medical needs, college, or related expenses.
- The common trust, or family pot trust. When there are two or more children in the same generation, parents or grandparents may decide to create a trust that operates as a “pot” and receives property for distribution to all the children. This is a way to centralize contributions and withdrawals. However, it could lead to conflict. One sibling may have greater financial needs than others, leading to potential bitterness over the distribution, whether or not they are permitted to receive more money from the pot.
- The spendthrift trust. This kind of trust only allows small or conditional disbursements for a beneficiary, made by an impartial trustee. This protects the trust property from being squandered, which may be wise for a young beneficiary. It can also provide safely for a loved one struggling with addiction, married to an untrustworthy spouse, or otherwise unable to manage money.
- The supplemental needs trust (SNT). Someone who relies on disability benefits cannot legally possess more than a minimal amount of assets. If they break this threshold, they are in danger of penalties or even losing their care. For this reason, a direct inheritance could be disastrous. However, the SNT allows a trustee to spend money on behalf of a disabled person. The trustee can pay for their utilities, transportation, and other needs that disability benefits do not cover. Since both Georgia law and federal law have specific requirements for trusts like these, an attorney needs to assist in its creation and administration.
Plans for the Future of the Trust
You should also consider the future of the trust property if it cannot be used. If the child passes away, should it become part of their estate, or should the trust continue and take their own children as beneficiaries? What will happen if the child does not want to go to college or use the trust assets for some specific purpose that you named?
Discuss this as a family, including the child, if possible. It is wise to have age-appropriate conversations about money and the future with the children you hope to provide for. Most importantly, you should know what your own assets can accomplish. A Georgia estate planning attorney can sit down with you and help you plan for all the children you care for.
Contact Attorney Mike Bascom’s office to discuss living trust creation, drafting a will, and other estate planning needs. Call us today at 770-285-5493 to schedule your free case evaluation at our Forsyth County offices.
