Before you see an estate planning attorney, decide who to name as beneficiaries of your estate. Also, consider asset distribution.
In California, the Revocable Living Trust (RLT) serves as the centerpiece of your estate plan. Your attorney will make sure home and non-qualified investment accounts transfer to your RLT. Qualified accounts, such as IRA’s and 401k’s, contain pay-on-death benefits. Do not transfer these to your trust because of negative IRS tax implications. For this discussion, we address assets in your RLT.
Surviving Spouse Asset Distribution
Married couples or domestic partners’ assets usually remain in the trust for surviving spouses or partners. Or maybe not. When the surviving person dies, the trust’s assets go to the named beneficiaries of the trust. For a single person, the court distributes trust assets upon your death.
Asset Distribution
Design your trust to make distributions to trust beneficiaries over time. For instance, when naming small children as trust beneficiaries, consider whether you want to distribute all of the assets in equal shares. For a “special needs child,” design a trust so that they receive their share from a resulting “special needs trust.” The language in the special needs trust allows trustees to make distributions without disqualifying that child for public benefits.
Share Trusts
Recalcitrant or “Spendthrift” children may require a “separate share trust.” Thus, distribute assets over time to that child for “health, education, support and maintenance.” Name a trustee to withstand pressure from that child. Otherwise, they may continually ask for additional distributions. This protects the trust for this child against judgment for creditors because the child will not have direct access to the funds.
Separate Share Trusts
If your have children are minors, “separate share trusts” can fit into your RLT for each minor child. Make distributions from the separate share trusts to the minor child during his or her lifetime. Valid reasons include “health, education, support and maintenance.” Make the final distribution to that child at a specified age, such as age 35. Staggered lump sum distributions (such as 1/3 at age 25, 1/3 at age 30 and the remainder at age 35 no longer apply).
Many of our clients request we create their RLTs with resulting separate share trusts for their grandchildren. Distribute designated amounts to the separate share trust of each grandchild when the grandparents die. The grandchildren will receive distributions over years for their health, education, support and maintenance. The assets in the separate share trusts should also be well protected from creditors, because the beneficiary grandchild will have no direct access to the funds. A trustee will be named, such as a parent of the grandchild, who will have exclusive authority to decide when and how to make the distributions to the grandchild.
This information should not be relied upon as legal advice, and you should see your attorney for further discussion and legal representation.