When parents make up their estates, they always want to make provisions for their children. If the children are very young when the estate is set up, then the parents would have no idea how well the children handle money. If the children are older and show signs of being financially irresponsible, then parents may want to protect the children from themselves.
If you have concerns about how your children will spend their inheritance, then you should set up a trust to protect how the money or property is distributed. There are several different types of trusts you can choose from that will allow you to take care of your children's needs while you are gone, and give you peace of mind while you are still watching your children grow.
The easiest way to protect your children from financial disaster is to set up an annuity that will be structure how you want it to be. You can decide how often your child gets payments from an annuity and how much those payments will be. This prevents your child from having access to and spending the lump sum.
If you have ever seen a movie where someone who was left an inheritance had to earn that inheritance by doing specific things, then you were watching an incentive trust in action. With an incentive trust, your child does not automatically get their inheritance when you pass away. You can set up certain circumstances that either trigger the release of the entire estate to your child, or create a series of activities that each have their own value.
With an incentive trust you can pay for your child's college education and then release the rest of the estate after they graduate. You can also dictate that your child must have passing grades to keep the funding for school in place, and must graduate to get the rest of the estate. Some parents set up incentives that pay the full estate after their child has been employed at the same job for a certain amount of time.
Celebrities and other people of means who have very young children will often set up trusts that pay out based on the age of their child. If you set up an age-based trust and you pass away unexpectedly at a young age, then your child would not receive payments until the specific ages that you outline. This prevents the child from spending the lump sum, and it also prevents a very young child from suddenly having a lot of money that they cannot handle.
A form of incentive-based trust is one that pays your child each year based on their income. If your child generated $30,000 in one year at their job, then the trust would pay a matching amount of $30,000. This type of trust not only inspires your child to stay employed, but it also encourages them to become successful.
If you are concerned that your child might not be able to properly handle the kind of estate they would inherit when you pass away, then you can use one of the many trust options available to protect your child from themselves. It may seem unfair to your child, but it gives you a chance to be a parent even after you have passed away.
