What Kind of Trust Is Best for Parents with Young Children?

Creating a comprehensive estate plan is something every parent should consider, regardless of their wealth. A trust is often a key component of that plan which, contrary to popular belief, is not an estate planning tool reserved only for wealthy individuals with large estates. In fact, trusts are especially valuable for families with young children who want to ensure that their children will be financially protected and properly cared for in the event of an unexpected death or incapacitation. To help ensure that your estate plan works as intended, the Indianapolis attorneys at Frank & Kraft discuss what kind of trust is best for parents with young children.

How Does a Trust Fit into Your Estate Plan If You Have Young Children?

When parents are no longer able to care for their children, either due to a disability or death, a trust can ensure that the children receive the necessary financial support and that the assets are managed according to the parents’ wishes. Without a plan in place, those decisions might fall to a court-appointed guardian or be subject to state intestacy laws, which may not reflect what the parents would have wanted. There are several types of trusts that can be useful for Indiana families, each serving a different purpose depending on the specific goals and circumstances of the family, including:

• Revocable Living Trust: A Revocable Living Trust is one of the most flexible and commonly used trusts in estate planning, outlining how the assets it holds should be used and distributed. It is established during the lifetime of the person creating the trust (the Grantor) and can be amended or revoked at any time. If both parents were to pass away or become incapacitated, the Trustee named in the trust would immediately step in and take over management of the trust property. This includes making financial decisions that ensure the children are provided for, such as paying for housing, education, and other necessary expenses. One key benefit of using a revocable living trust is that it avoids probate, which means the assets can be accessed and used without delays, court intervention, or additional expenses.
• Education Trust: For families in Indiana who are especially focused on education, an Education Trust can be a useful tool. Although many families are familiar with 529 college savings plans, these accounts alone may not offer enough flexibility or protection. An Education Trust can set aside funds specifically for tuition, books, housing, or other educational expenses, and provide instructions on what happens to any remaining funds if they are not needed for schooling. For example, you might allow the balance to be distributed at a certain age or retained for graduate studies. You can also designate a trustee to oversee the use of the funds and ensure they are spent in accordance with your wishes.
• IRA Trust: Another option is an IRA Trust, which is especially relevant for parents who have saved for retirement through an IRA account. Naming a minor child as the direct beneficiary of an IRA can cause complications because your minor children cannot legally inherit from your estate. In such cases, a court-appointed guardian must be named to manage the account until the child reaches the age of majority. With an IRA trust, the funds from the IRA are directed into a trust upon the account owner’s death. The trust then controls how and when the child receives the funds, and a Trustee is appointed to manage the money. This ensures that the child has the financial resources they need at different stages of their development, without having full access to a potentially large sum at a young and impressionable age.
• Trust for Minors: Parents may also consider establishing a Trust for Minors which allows the person creating it to set clear instructions about when and how the child will receive distributions from the trust. As the Grantor of the trust, you can include trust terms that direct funds to be distributed to your child(ren) at specific ages, such as 25, 30, and 35, rather than all at once. Alternatively, you could create trust terms that dictate the funds are to be used strictly for health, education, and other essential needs until the child demonstrates financial maturity. With this kind of trust, the Grantor (you) retains control over how their assets are used, even after death, and ensures that the funds are used responsibly.

Asset Protection Benefits of Trusts

It is also important to remember that trusts can provide protection from outside threats. A properly chosen and well-structured trust can shield assets from creditors, lawsuits, and even future divorces involving your children. For example, if a child inherits money outright and later goes through a divorce, those funds could become subject to division. Assets held in a properly drafted trust may be protected from that outcome.

Establishing the right type of trust involves careful thought and planning which makes working with an experienced estate planning attorney essential. Your attorney can assess your family’s unique circumstances and recommend the most appropriate type of trust or combination of trusts to ensure that your assets and your children are protected.

Can We Help You Choose a Trust to Protect Your Young Children?

For more information, please join us for an upcoming FREE seminar. If you are a parent with young children and would like assistance deciding which type of trust is best for your estate plan, contact the experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.

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