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Financial
Nov 1, 2017

The Merits Of Trusts Vs. Guardianships For Minor Children

Sponsored Content provided by Susan Willett - Director of Trust Services, Old North State Trust, LLC

One essential parental duty for parents is to make plans for their children should the parents die prematurely.
 
The first obligation, of course, is to decide who should be given the power and duty to care for them in the parents’ place. This is called guardianship of the person.
 
But it’s just as important to specify who will be responsible for the children’s inherited assets. One approach is to appoint a guardian for the estate, a person who will have to answer to a court while the surviving children are minors. The other approach, which has considerable advantages, is to put the children’s estate into a trust.
 
So, to define our terms - a guardian of the person is appointed, in place of the parents, to physically take custody of a minor or incompetent person and care for their physical needs, and the guardian of the estate is someone who qualifies, with the approval of a court, to take responsibility for the child’s or incompetent adult’s finances. A trust is a contractual arrangement by which assets are entrusted to the care of a person – the trustee – who is obligated to manage them for the child’s benefit. A trust operates on a different legal foundation than a guardianship.
 
Why choose a trust? Without one, a guardian must be named to manage any assets left to minors. That guardian may also need a lawyer and accountant. All these people must be paid, and those costs come from the child’s assets. Guardians must be bonded - a form of insurance that requires annual premiums - and must make regular reports to the court.
 
That court oversight also requires a fee, which is based on the value of the assets involved. So, the seemingly easier option, in fact, comes with considerable costs and complexities.
 
If a trust is used instead, no bond or court accounting is required. The trustee would have full power to manage and protect the children’s inherited assets. That’s not to say a trustee isn’t accountable, however. The trustee would still be required to provide regular statements to someone that the parents appoint when the trust is set up. That might be the guardian of the person, but could just as easily be anyone else. Either way, no court costs are involved.
 
And while there’s a cost to having a trustee manage an estate, even under a guardianship someone must in charge. Either way, in other words, would involve some cost for investment management.
 
This is a situation our company has dealt with a number of times; we function as trustees to benefit our clients’ surviving children.
 
In one of those relationships, we manage trusts for two minor children. These were set up under a settlement agreement established through a wrongful death suit. We provide tuition and other expenses for the children’s private schools, camps and other activities. We are investing the proceeds from the settlement to provide for their college educations and to help with whatever other needs may arise. Both are healthy, so they have only routine medical needs, but the trust would provide for whatever care they might ever need. 
 
It might seem that setting up a trust is a complex undertaking. But it’s actually less involved than all the hoops somebody would have to jump through to set up a guardianship for a child who inherits an estate outright. Costs less, too!
 
All the decisions about how assets are managed, and when they are distributed, are up to you, rather than determined by a default that’s dictated by law. That’s important, because sometimes it’s necessary to make provisions that a guardianship can’t accommodate. One obvious example: a guardianship automatically expires once a child reaches the age of 18. But there are plenty of good reasons to keep some level of oversight on that now-adult child’s assets.
 
Even if you are 100 percent confident you’ll live at least until your children become legal adults (and who can be that certain?), you still may want to shield them from the temptations of getting too much money too young. It’s a reality these days - despite reaching official adulthood, some young people haven’t yet matured in terms of their financial decision-making abilities.
 
Another reason to consider putting an inheritance in trust for adult children is to protect their assets from being taken by a future ex-spouse. I know the phrase “future ex-spouse” sounds like a joke, but with more than half of all marriages ending in divorce, it’s simple prudence to consider the possibilities. Someday your child might marry someone who doesn’t work out.
 
Likewise, should a child get into debt trouble, a trust is shielded from creditors. So, even if you have every confidence that your offspring will grow up to be responsible money managers, it doesn’t hurt to anticipate the worst that might happen. After all, even with the highest skills and the best intentions, anybody can run into bad luck, such as a business failure, accident or catastrophic illness.
 
Here’s another possibility - you can continue to protect your heirs’ assets from creditors, including ex-spouses, even after they have been entrusted to make their own financial decisions. The trust can be structured so that, after achieving a specific age, the child becomes the co-trustee. So, while the original trustee may still have the power to decide how money is distributed, the (adult) child can name somebody else to that trustee’s position. That’s an excellent way to phase in a child’s financial independence.
 
What all this adds up to is that trusts are incredibly flexible, and can be structured to achieve a wide range of objectives, not just for minors but for people of any age.  But because of all the possibilities, and unavoidable legal complexities, it’s a subject that’s best discussed with a qualified estate-management professional.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely. 

Susan Willett is the director of trust services and oversees all aspects of trust administration for Old North State Trust, LLC. Old North State Trust, a North Carolina chartered trust company, provides: asset management services; income, estate and trust tax consulting; retirement planning and administration; and trustee and estate services to both individuals and businesses. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.  

 

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