You have decided to create a trust to protect your assets for your heirs. However, you also need to consider when and how you should terminate your trust, including what happens to any assets still in the trust when it ends. Resolving these issues can be difficult and easily result in family conflict. Consulting an attorney is best so you understand your options and how they will impact your beneficiaries. When we advise clients, we ask some of these questions:
Who Do You Want to Get the Trust Money After the Primary Beneficiary Dies?
Often, the primary beneficiaries of a trust are the grantor’s children. Therefore, upon their deaths, something must happen to the money they were receiving. Do you want the trust to terminate and the principal paid out to your child’s heirs or to a third party like a charity? Or would you like the trust to continue with the grandchildren or other parties becoming beneficiaries? In the latter case, the principal can be held in one trust or separate trusts for each beneficiary.
How Do You Want to Divide the Trust Shares Among Your Grandchildren?
If you have multiple children and decide that the trust should go to your grandchildren after your children die, you should consider what happens if your children did not all have the same number of children. Let’s say you have 3 children – Child 1 has 1 child, Child 2 has 3 children, and Child 3 has no children. You can state in the trust that each child gets an equal share of the trust and that share goes to their children. That means your grandchild from Child 1 gets 50% of the trust; your 3 grandchildren from Child 2 share the other 50%, and Child 3 has no right to pass along his/her share to someone else. Some people may feel that scenario is the fairest while others may think that each grandchild should get an equal share (so the 4 grandchildren split the trust equally). Still, others may believe that Child 3 should also have the power to name a beneficiary of his/her share and not be penalized for the lack of children. This issue often results in bad feelings within families.
Should You Continue the Trust for Your Grandchildren?
The decision to continue the trust should depend in part on how much is left in the trust when your children die. Trusts can be expensive to maintain and it may be best financially to terminate the trust and pay out the remainder to your grandchildren. If you are not sure what to do, you can give an independent trustee the power to terminate the trust if it makes sense economically to do so.
Do You Want to Donate to Charities?
You may choose to end your trust and give the remainder to a charity. That has tax benefits as well as fulfilling your philanthropic impulses. However, during the lifetime of the trust, you can also allow the trust or beneficiaries to make charitable contributions. Note that it is usually more advantageous for the tax deduction to be taken by the trust rather than the beneficiaries.
What Is the Best Solution for Your Needs?
You can’t decide how to structure or terminate a trust without examining your needs and goals. Our attorneys have extensive experience with trusts and can help you evaluate your choices and design a comprehensive estate plan that works for your situation. Contact us today.