The Beneficiary-Controlled Trust: Protect Your Child’s Inheritance at Any Age

When properly drawn and executed, certain estate planning measures can perpetuate familial harmony and security.

Authored by By Paul Arslanian, Attorney, C.P.A., Managing Partner, The Arslanian Law Firm PC

Upon first glance, there doesn’t seem to be much correlation between family values and family finances. It’s hard to imagine how the morals and attitudes of family members can be affected by family investments and trusts, but unfortunately money continues to be the catalyst for many family squabbles. Parents must consider how to be fair to all of their children, both those in the family business and those who are not, when considering how to disperse their assets after death. Improper planning has the potential to make an already tense situation much worse. When properly drawn and executed, however, certain estate planning measures can perpetuate familial harmony and security.

Trusts are perfect examples. In general, standard trusts are simply assets invested and distributed by a relative, friend or professional, as trustee. This can be for any length of time, but is typically until the child or other beneficiary attains a specified age. The trust itself is a written document that provides these directions to the trustee. Parents use trusts in estate planning for many reasons. Although the probate avoidance and estate tax benefits are significant and well documented, the most important reason for individuals with young children to establish trusts during lifetime and upon death is to ensure that the inheritance is protected until the children attain a specified age. A responsible individual or institution will invest and distribute the trust assets for the child until the child is mature enough to have the requisite knowledge (absent mental or physical disability) to appreciate the security offered by responsible investing and distribution of the inheritance.

Although trusts which provide distributions upon specified ages are generally perceived as the standard option, many additional options should be considered for children of any age. One of those options is the beneficiary-controlled trust. This trust remains in existence for a child’s lifetime, allowing the child to secure certain advantages of a trust without some of the commonly perceived disadvantages, such as control by third-party individuals or institutional trustees.

What are the advantages of a beneficiary-controlled trust? The answer is many of the same basic advantages that are found in standard trusts, but better because you can secure these advantages for your child’s lifetime.

First, some explanation: The beneficiary-controlled trust can be seen as having two stages. Like a standard trust, the beneficiary-controlled trust is invested and distributed by a trustee until the beneficiary (typically a child) attains a certain age. And, like a standard trust, the primary purpose of the trust during this stage is to assure that a responsible individual or institution will invest and distribute the trust assets for the child until the child is mature enough to assume control.

In either trust, the assets are better protected from the claims of a creditor of the child, such as a divorcing spouse. If the child were to die with assets in the trust, the assets may escape estate taxation, and the trust might require that the assets pass to the child’s children or siblings rather than passing to the child’s spouse, or to non-family members.

The standard trust would distribute the assets or give unfettered access to the child upon attaining a specified age. Or, instead, it might provide access in smaller portions at more than one age, for instance: one-third will be distributed at age 30, another third at 35 and another third at 40. This is where the beneficiary-controlled trust is so different from a standard trust.

Rather than distributing the entire trust assets to the child when he or she is old enough to have control, the beneficiary-controlled trust can provide that the child becomes the trustee at that time. By becoming the trustee, the child makes the decisions on when and how much of the trust assets are distributed for his or her maintenance and support. The trust remains in existence for the child’s lifetime; therefore, the benefits typically offered by a standard trust during the child’s youth may be available to the child for his or her entire lifetime.

The terms of the beneficiary-controlled trust and whether there is a co-trustee (which is also an option) determine the degree of creditor protection, tax cost or savings and other attributes of the arrangement. In almost any form, however, this arrangement is likely to provide much more assurance that the assets are not available to a divorcing spouse, or other creditor of the child, and that the assets will continue to pass in the family’s bloodline upon the child’s death at any age.

Beneficiary-controlled trusts are often incorporated into a thorough estate plan due to the significant benefit they provide, with little loss of flexibility or control. The beneficiary-controlled trust should always be considered when planning for the security and future of a child, grandchild, or any other beneficiary.

Paul Arslanian is an estate planning attorney and managing partner of The Arslanian Law Firm PC, based in Bloomfield Hills, Mich. Admitted to the State Bar of Michigan in 1985, Arslanian has extensive knowledge in the fields of estate planning, business and corporate law, tax planning, and probate and trust administration. Arslanian can be reached at paul@estateplans.com or (248) 540-7500.