Trusts, part 3: Inter vivos trusts—from The Inheritance Project

In the previous blog post I recommended inter vivos trusts, or “living trusts,” as the best option for wealthy parents (or grandparents) who want to give money to their offspring in trust.

Once again, this is not a simple subject: there are, in fact, a number of kinds of revocable trusts that may be distributed to inheritors. The two most commonly used kinds of revocable living trusts are: simple trusts and what are usually called “stepped-in trusts.”

A simple trust is generally simple in nature: a certain amount of wealth is distributed to the beneficiaries at a certain age. The most common ages for distribution are eighteen and twenty-one. Such trusts may allow the beneficiaries full control of the assets, or they may pay out distributions (normally, distributions of income) at set times—for example, every six months or once a year. (With all trusts there always has to be a trustee: either an individual or an “institutional trustee”—most commonly a trust company.) Giving beneficiaries full control of their assets is very risky, and I would not recommend it. It is far too easy—and has happened far too often—for beneficiaries with full access to their wealth to run through their money in a few months, or a year or two. It can be a learning experience, for sure, but the many down sides outweigh this “advantage.”

A stepped-in trust is structured to distribute amounts of money over a period of time—every four or five years, for example. Often these trusts are dissolved when the beneficiaries reach a certain age—twenty-five or thirty, for example, or thirty-five. At that point the beneficiaries receive full control of their assets.

In  the book Labors of Love: The Legacy of Inherited Wealth, Book II, a parent and inheritor, Diana Garrett (a pseudonym) describes how she and her husband created trusts for their children. The lawyer they chose to work with recommended “that it was probably a good idea to make sure that the children would have to work as young adults. That was a wise thing to have planted in our heads when we were young adults, and it has proved its wisdom. . . . [Each of our children would get] a chunk of money—not enough to be dangerous—when they’re twenty-one. It’s just about enough to buy a car. And when they’re twenty-five, the trusts . . . will distribute to them, but even then they will receive fairly small amounts—enough to go to graduate school or buy a house.”  The Garrett family is blessed in a number of ways: all the children—now adults—are happy and productive. Much of their success and happiness can be attributed to the good parenting they received, but it can also be credited, in part, to the structure of their trusts.