Imagine grandparents in a bank creating a new certificate of deposit. The bank clerk tells them that they can leave the money to their grandchildren and avoid legalization.
How? Create the account “John and Jane Grandparent I / t / f Grandchild”.
This sounds easy enough, especially since grandparents still own the money while they are alive. After all, it would be great for your own children if that money was there to help raise the grandchildren.
Unfortunately, the bank officer’s plan does not work to accomplish the goal. With just a little care, the grandparents plan can be done.
Here is the problem. Parents have a legal obligation to support their children. The courts decide what is best for the child, even if that is in opposition to what the parents think is best for them. However, even if a judge agrees, there are limits to what you can decide. Those limits often don’t make sense, but they are the law.
If the child receives a large sum of money, the law requires the guardianship to keep the child under the supervision of a court. While a parent is likely to become the guardian to manage the property, that management is subject to court supervision.
The first duty of the Court is to preserve the property of the wards. This includes not spending on items that are legal obligations of the parents. If you want the gift to help parents raise their grandchildren (better schools, tutors, summer camp, uncovered medical expenses), avoid guardianship.
Once a guardian called me to help him with this. His niece, whose parents had died in a car accident, left him a good deal of money on life insurance and other assets. This aunt was named the child’s guardian. That girl was now eighteen years old and she wanted her money. The Guardian asked me to help convince her to keep it in some kind of account where he could protect her interests while she went to college and grew a little older. But she wouldn’t accept any of that.
The young woman was eighteen years old with a legal right to an automatic distribution of the money. With her was a twenty-year-old “friend” who was going to help her manage it. The “friend” had a vision of her talent and the young woman’s money in the hope of making big profits.
We try to explain how investing can save and protect capital and obtain reasonable returns. Our point was that this legacy from your parents would serve you better without risk. Instead, it could be set up to help you maintain it for the rest of your life. The sad thing is that we were older people who did not know as much as her “friend”.
The young woman asked the Court for an immediate distribution. There was no other option under the law and she got it. Later they told me that the money was gone in a year.
Although the bank official initially acted in good faith, the grandparents would not like the outcome of the simple plan. Your own children could not use the money to benefit children with better education, tutors, nicer clothes, and summer camps. Plus, those cute little kids would get their hands on it at eighteen. Although there are many young people of that age who are very bright and responsible; chances are high that they will be swayed to waste the gift.
The best alternative is for the grandparents to leave the money to their own child as trustee for the grandchild. The terms of a trust can be very flexible (unlike strict guardianship rules. They can allow the parents of the grandchild to use the money for the benefit of that grandchild. This is even if the money is spent on things the parents would have a legal obligation to do). Furthermore, there is no direct judicial supervision of the trust activity. The court comes into play only if there is a complaint against the way the trustee acted. This saves time and expense.
Distribution can be done at specific ages, not just eighteen. Many prefer staggered distributions. For example, some at 18, some at 21 and the rest at 25. Some choose schedules like some at 21, some at 25 and the rest at 30. The theory is to allow the child to have the opportunity to spend some of the money, and then the majority is left to think better about the future. Your own best judgment controls.
These tips also make sense for parents thinking about their own estate planning. The trusts that manage the property they leave for their children are also important in their plans.
Simple setup does not usually provide the best results. However, good planning and execution facilitate the best plans. Estate planning is the foundation of your family’s future. You need and deserve proper care.