How should I set up this trust
April 3, 2011 10:43 PM   Subscribe

What are some ways to structure a trust? I'm setting up a trust so that if I die, my child would not have a sudden, relatively large windfall. I've got life insurance, 401k and quite a bit of equity in a house, and at this time, I think it would be problematic.

It sounds like I need to set an age where he'd get the full amount. The trustee will be a close family friend, whose judgement I trust, and who can make decisions about health, welfare and education. It's okay with me if my son takes a trip around the world, but not okay if it goes on hookers-n-drugs. He's doing really well, but has abused drugs in the past, and I think the cash would be bad for him. He's in his early 20s.

A good age to let him have whatever remains, and the trust to be closed up?
Should he have a monthly (quarterly/annual) draw on the trust?
or use it only a needed?

The lawyer gave me some ideas, but looking to see how others may have handled this. I'm divorced, his Dad is financially irresponsible, and I hope to be using this money for retirement, but things can happen. thanks.
posted by anonymous to Human Relations (11 answers total) 5 users marked this as a favorite
The drug issues could persist even if you are giving him limited amounts of money until a certain age. Is he in a treatment program of some kind that is working for him? You could possibly make payment from the trust dependent on his staying in the program, i.e. he gets a payment of X amount from the trust quarterly or biannually provided he goes to one AA meeting in that time or whatever the program is.

I'm not sure how he would feel about that; it could be a welcome source of support after you pass, or it could cause some resentment, depending on how he sees it. But since almost all addicts will face the temptation to relapse (and many will indeed relapse, sometimes more than once), it could be at the very least one more reason to stay in the treatment program if he hits a low point after your passing.
posted by wansac at 1:18 AM on April 4, 2011

Two trust fund stories for you:

I got a trust fund at 21. I blew through it - more or less on hookers and booze - by the time I was 25. I would not suggest early 20s for most people for large amounts of money. I went to school with a lot of children of extremely wealthy people and I never saw premature trust fund end well.

My father is a beneficiary of the same trust with a different structure. He gets a payment every month. As it happens, the amount is just enough to have demotivated him from working for the past, oh, 30 years and to support his drinking. My father is basically a dilettante.

Initially the trust was managed by a "close family friend" whose judgement my grandparents trusted. When that person embezzled a significant chunk of it, management was switched to the Baptist Foundation of (Insert State Here) and while I'm not exactly down with the ethos of that organisation, to the best of my knowledge they've done an exemplary job.

Critically, my father has been able to apply to the trust under the welfare provision for significant disbursements to cover the down payment on a home. This has kept him from homelessness, for which I am grateful. I wish I had been able to - in fact had to - apply to the trust for similar funds for a down payment on a home or to pay off a mortgage or educational debt.

My best suggestion is that you tell your son nothing of this trust and that you live long enough to spend these funds in your retirement. Failing that, I would leave him a lump sum on your death and stipulate that the balance held by the trust to be used for direct education, health and welfare payments only.
posted by DarlingBri at 2:48 AM on April 4, 2011 [2 favorites]

A common formulation - income to the beneficiary, 25% of principal at age 25, 50% of remainder at age 30, and the remainder at age 35. Trustee has the discretion to use principal at beneficiary's request for down payment on a home, starting a business, extraordinary medical needs, or for education. Trustee has the discretion to delay or deny any of the three principal distributions if the beneficiary is incapacitated due to drugs or alcohol or for creditor protection purposes.
posted by yclipse at 4:09 AM on April 4, 2011 [4 favorites]

You don't have to give your son the full amount at all if you don't wish to; you can allow him to draw on the principal for health/education/etc. or receive interest income, and leave the balance of the remaining principal to grandchildren (if there are any) when he turns 40/50/whatever, or leave the balance to a charitable organization of your choice, etc.

This isn't uncommon among wealthier parents who don't want their children to grow up to be like DarlingBri's dad -- too lazy to really work because they know there's money coming -- especially if they're talented kids who can make their way in the world if they set their minds to it. The trust provides back-up support through their young adulthood and middle age, and then they're on their own.
posted by Eyebrows McGee at 5:42 AM on April 4, 2011 [2 favorites]

Previously I wrote there about how I'm not really a fan of trusts, although it depends on the spending habits of the beneficiary. (I currently am the beneficiary a trust that I can't get the full principal of for another ten years despite the fact that the amount of money in it is relatively small and would be not at all life-changing for me in any way. Furthermore I believe that a person's responsibility with money is something that has much more to do with their inborn personality than the age at which they get the money. That said if you do go with the trust anyway, the linked thread provides plenty of examples of why you should let the trustee make discretionary distributions.)
posted by phoenixy at 6:13 AM on April 4, 2011

If you are seriously concerned that your son will have a persistent substance abuse problem and you want to protect the money for his welfare in that (or any other) case, you should say something to your attorney that communicates THAT desire. He should be able to set up a health and welfare focused document that will do the job.

Also, DarlingBri makes an excellent point re: trustee - you should seriously consider a disinterested 3rd party rather than a personal friend. Even a good friend can get into a financial situation that inspries perfidy.
posted by Medieval Maven at 6:14 AM on April 4, 2011 [1 favorite]

This may be in the previous linked thread, but the book _Beyond the Grave_ goes into a lot of discussion of what kinds of trusts are useful for different specific concerns about beneficiaries, and contains a lot of wisdom-from-experience on the subject.
posted by endless_forms at 7:15 AM on April 4, 2011 [1 favorite]

My grandfather was a trust lawyer, and thus left his (modest) bequest in a great generation-skipping trust overseen by a bank. It left the principal for grandkid education, health, and housing, with various caveats that made it hard to get money for something like kidnapping and easy for my mom to have principal for anything reasonable (but then he trusted her financially). As far as I know there is no lump sum available until the middle generation has passed away (and thus had access to the money for health care as long as they need it).

But, basically, my message is to talk to a good trust lawyer that you're comfortable with. They can set it up so that the money can dance to Exactly the tune you'd like it to.
posted by ldthomps at 8:19 AM on April 4, 2011

On reflection, I need to emphasise two points:

One, the embezzling party was a certified, bonded, chartered accountant and a family friend of long standing. When put in control of a lot of money, or when faced with a significant change in their own financial circumstances and in control of a large amount of other people's money, people are not always what you would hope. Medieval Maven is correct about the temptations. Please be cautious in the extreme.

Two, my father is not just a dilettante; he's an alcoholic dilettante with a lifelong, major league drinking problem. He has been in and out of rehab and hospitalised dryouts his whole adult life. He has had fleeting periods of sobriety in his 20s, his 40s and now again in his 60s. People with substance abuse problem are always at risk for relapse. I wouldn't even have characterised myself as reliably clean and sober until I had a good, oh, ten years - and then I fell off the wagon and had to restart my chips all over again.

Basically I think on reflection I would go with something along the lines of what Eyebrows McGee is suggesting. If the trust can act as the parent who is absent and make disbursements that mirror the gifts a financially able parent would make - education, housing, healthcare, etc - that seems ideal to me with an at-risk trustee. The trust should not undermine the need to hold together a financially solvent and stable life, nor should it support habits that undermine that.

I'm sorry to go on at length about this but as you may have gathered, despite my grandparents best intentions this trust has been central to our lives in a way that was vastly, vastly less beneficial and more destructive than they wanted.
posted by DarlingBri at 8:21 AM on April 4, 2011 [2 favorites]

You might want to check out the book "Beyond the Grave." It has some good ideas and good and bad estate planning scenarios.
posted by small_ruminant at 11:23 AM on April 4, 2011

oops. Should have read the comments more closely.
posted by small_ruminant at 11:26 AM on April 4, 2011

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