How to Prepare an Estate Plan for a Child Who Has “Issues”

estate plan for childAs parents, we all hope and pray that our children will grow up to be good people and productive members of society. And for the vast majority of us, that is exactly what happens.

But what happens if you have a child that is influenced by peer pressure to try drugs or falls into the wrong group of friends? Or maybe your child makes it through high school and college without any issues, but then marries someone who doesn’t share your values or steers him or her down the wrong path?

How do you create an estate plan for a child that may have personal, legal or other issues that you may not even be aware of?

Don’t Ignore the Issue… It Won’t Go Away

The first thing you need to know is that you should, under no circumstances, ignore the issue.

Many people put off their estate planning to let things “calm down”. They believe, incorrectly, that if they don’t prepare their estate plan, that they can keep their beneficiaries from getting their money.

In reality, the opposite is true. Under North Carolina’s intestacy rules, your children may inherit a portion of your estate, even if you are still married when you pass away.

So by failing to plan, you may actually be planning to give money outright to the people who you least want having free access to funds.

This could be true even if the majority of your estate is tied to life insurance. Many people make their spouse the primary beneficiary of their life insurance policy, and make their children the contingent beneficiaries.

Under that scenario, if something happens to both you and your spouse, your children could receive a sizeable inheritance when they turned 18, and you would have no way to control what happened to that money or how it was distributed to your kids.

Obviously, this is not the scenario that most people envision or would knowingly plan for.

Before we discuss how you may want to plan in these situations, let’s briefly touch on what type of legal or personal issues your children or beneficiaries may encounter that would require special planning.

What Legal Issues Might You Want to Plan for?

There are a number of various legal or personal issues that you may want to plan for. Here are just a few:

  • Substance Abuse Issues
  • Criminal Activity
  • Legal Troubles, including divorce
  • Joining a “cult” (laughable and rare, but yes, it does happen)
  • Spendthrift Issues (difficulty managing money)
  • Credit Problems
  • Protection from their spouse
  • Special Needs Planning

In each of these situations, there is a valid reason to withhold access to and control over funds from your beneficiary. The question becomes, how do you do that?

Estate Planning Options to Control Access to Funds

The most common method used to control access to funds is by using a trust. You can prepare a testamentary trust (which is created when you die, through your will), or you can draft an inter vivos trust while you are living that would control how your assets are passed on to your beneficiaries.

Since many of us will never know if or when our children may get into personal or legal trouble that would require us to limit their access to or control over funds, drafting a trust that is flexible on these issues is a helpful planning option.

There are two ways to limit your child’s access to or control over funds, should this become necessary.

#1 Appoint an Independent Trustee

First, you will want to appoint an independent trustee to manage the funds for your child. If you have more than one child, you can provide that a separate trust is set up for each child at a certain age. This is a common estate planning technique, and you can give the trustee guidance on how you want the funds to be distributed.

In other words, you can tell the trustee to distribute the funds to your children liberally, or you can ask that they be more conservative. The sky is the limit on what you can do.

#2 Use Blocking Language to Keep Your Child From Becoming Trustee in Certain Situations

Second, you can dictate when and how your child may take over and become either a co-trustee or the sole trustee of their own trust. This is where the planning really comes in handy. If you have serious concerns about your child, you can simply direct that an independent trustee will manage your child’s money for the rest of their life.

However, most parents want, at some point, to transfer control over the money in the trust to their child directly. They can say that the child will become co-trustee at a certain age, and sole trustee several years after that.

At The Hart Law Firm, we give our client’s the option to include “blocking” language in the trust. This is language that would prevent a child from becoming trustee if they have one of the issues mentioned above.

So for example, if your child is bad at managing money, is going through a divorce, has joined a cult or has a drug problem, then they can be “blocked” from becoming the trustee of their own trust, and the trustee can withhold distributions. Once the child resolves those issues, and the trustee is comfortable that they have, then the child can assume their duties as trustee of their own trust.

This is a great option to protect a child from themselves, while at the same time making sure that their financial needs are taken care of if and when necessary.

Need to Set Up a Trust For Your Children?

At The Hart Law Firm, estate planning lawyer James Hart can work with you to ensure your trust is drafted the way you want so that when an estate plan is necessary, your wishes are carried out.

Feel free to call our office at (919) 460-5422 to set up a free wealth planning session ($350 value) to go over your options and answer any questions you may have. You may also fill our this simple form on our contact page.