By Wayne Cooper
Today we are going to discuss restricting your children’s access to trust income.
Trust income is generally the income earned by the trust in the form of interest and dividends. Parents today are concerned the large inheritance will not empower their children to succeed but instead could enable their children to sit back and do nothing other than collect checks generated from the trust. In order to avoid that result, parents are including more restrictive language in their trust documents. In the past, parents have frequently required children to attain a certain age, such as 21 or 25, before they receive automatic distributions of income from the trust. Rather than use the attainment of ages, many parents now are trying to assure that their children have started down the path of success before they are entitled to automatic distributions. This could be determined based upon achieving a certain level of education such as a bachelor degree or a graduate degree or maintaining a certain term of continuous full-time employment such as three years with the same employer. In this way parents are assured that the child is at least headed in the right direction before receiving automatic distributions of income.
When determining how much income the child will receive, it is good to estimate how much income the trust will generate. For illustrative purposes we use four percent as a rule of thumb therefore a five million dollar trust would generate about two hundred thousand dollars of income. This could be more than the parent would want the child to receive upon graduating college or even after working three years. Accordingly, the parent may want to restrict the amount of income that is being received to a percentage of the income or even to a stated amount. Sometimes the parents will use a combination of the two and provide a ceiling to the amount the child will receive.
For example, the child may be entitled to fifty percent of the income generated by the trust, but no event more than fifty thousand dollars per a year. Some parents, however, are concerned that the trust will not be large enough to generate enough income for the child. In that event, the parents would have a minimum amount that would be distributed to the child each year, even if it required dipping into (principle).
Access to income can change during the child’s lifetime. For example, although they may be entitled to only fifty percent of the income upon graduation from college, you can increase that to a hundred percent of income at a later date, for example, upon marriage, upon obtaining a certain age, or some other criteria. Anticipating the amount of income the trust will generate and the effect that income and access to it could have on your child’s life is an important step in determining the right amount of access to wealth your child should have.