Blogs

Thank you very much for your response Janene!  

The source of the inheritance sounds like movie script. A distant uncle left all living descendants equal portions of his estate to be distributed 20 years after his passing.  There are a large number of descendants, but my client and her two sons will each receive a portion estimated to be around $4 million dollars each.  Since this money will be distributed outright, the parents would like to protect the children (from themselves) and limit the children’s full access/control at the age of majority.  Since the parents are not the grantor, they do not have full rights to put limitations on the money, but they are hoping a trust (or the court in necessary) could create a barrier so there is now way the sons could blow it all at 18.

Side note: the parents will expect college to be paid out of their own inheritance and a 529 Plan would help add some limitations/tax shelter to a small portion of the inheritance.  I am trying to figure out if/how a kid could self-fund a 529 Plan. It you have any thoughts on this as well it would be appreciated.

Thank you!
Robin Giles

There are a couple of questions that come to my mind in reading your post. What is the source of this inheritance? Is this money coming from the parents? Is it from the termination of a trust? Gift from grandparents? Settlement from a lawsuit? That’s part of the equation IMO. If this is a gift from the parents, then consultation with a Board certified Estate planning attorney is in order. It sounds like the first attorney was not necessarily well-versed in trusts.  To me, the advice to turn the money over to the court was terrible advice and borders on malpractice. Who is currently in control of these funds? Whoever that is needs to be brought into the process if possible. The controller of the funds could set up a trust and name the parents and/or a corporate trustee to oversee the funds. The trust language can contain language limiting access to corpus for anything other than HEMS until certain milestones are reached. While there is the issue of “kiddie tax” on the trust income, this could be mitigated through selection of tax efficient investments. There are a lot of moving parts here, but First is the source of the inheritance and engaging that source (if possible) in the planning process.

You obviously have two different issues here. 
First, having dealt with trusts for minors who inherit substantial money, to the best of my knowledge, turning it over to a court is not in the children's best interest unless there are no responsible parties available to be trustees. The court, in my experience, will require CDs or Treasuries for the money to preserve the nominal principal but will by quite happy to see inflation and fees gradually diminish the purchasing power of the inheritance. And... again to the best of my knowledge, they are still going to be the recipients of the money at age 18 or 21 depending on the provisions in the will and state law. The plus in that route is that it limits the ability of the now minor children to sue for damages when they reach majority.

In my humble opinion, presuming you are a true fiduciary, fee-only investment adviser, and can apply the standards of the Uniform Prudent Investor's Act of your state, as well as ERISA standards to the portfolio, setting up the portfolio under MPT with clear best-interest standards and the parents as trustees is probably the optimal situation. 

I suggest you find a board-certified estate attorney to work with on this who will represent the children and is willing to work with you, again presuming that you are a truly independent fiduciary with an appropriate fiduciary bond and able to work under ERISA and UPIA standards. 

If you have any contamination with conflicts of interest or work for a broker-dealer by employment or contract, you are on thin ice and could easily find yourself in deep, deep trouble for some simple mistake. 

Regarding the 529 Plan. I am curious who could be the donor? To the best of my knowledge, a minor cannot create a 529 plan for themselves. The 529 is considered to be an asset of the parent or other trustee/donor. The children would have to gift the money to their parents who could then open a plan, but having children/beneficiaries gifting money to their parents is pretty much a violation of fiduciary duty. 

Beyond that, the trust, whether a UTMA or more formal trust, will have income each year that must be claimed by and taxed under the children's SSAN. I recommend a separate account be set up for that income to the degree it exceeds the cost of reasonable care and standard of living. Here is where a formal trust is in order. Providing specific language in the trust that will control the disposition of that income received from the inheritance before the age of maturity is, in my opinion, critical. Here is where a board-certified estate attorney will be critical. 

If you are on top of your game and a professional fiduciary, you can work with your clients and the attorney to develop a clear and responsible plan that will guide and protect all concerned. Once again, if you have conflicts of interest, you are treading on dangerous ground though.

​Since there appears to be no restrictions on the inheritance I cannot see how the attorney plans to control past the age of majority.  529 contributions make some sense although I would be tempted to suggest limiting it to enough for one private college education bill split into two accounts.  Nothing wrong with setting up regular parent custodian accounts for some of the funds, perhaps half the balance after 529 contributions.  Perhaps the rest could be invested in some type of deferred annuity for each that could be activated if the parents thought it necessary before 21.  Also, they could each buy $10,000 of I-bonds each year.