The Practical Planner Podcast: “How to Leave Assets to Children & Minors”

Date: November 6, 2024
Hosts: Thomas Kopelman (A) & Dave Haughton (B)

Overview

In this episode, the Practical Planner continues its exploration of how advisors can better serve families with children when it comes to estate planning. Thomas and Dave dive into the nuts and bolts of using trusts to leave assets to children and minors—unpacking the decision-making, trade-offs, creative options, and psychological considerations for parents and advisors. This is part two of a series, picking up from last episode’s focus on account structures (529s, UTMA, etc.) and now shifting to trusts: how, when, and why to use them to set up children for both financial stability and personal growth.

Key Discussion Points & Insights

1. Outright vs. Trust-Based Inheritances

(01:36) Dave Haughton:

• Outright Gifts:
  • Assets are given directly to children upon death with “no restrictions.”
  • “They get full access to the money, it’s theirs, they can do whatever they want with it, no restrictions. That's probably actually the most common way that people leave assets.” (01:43)
• Trust Structures:
  • Trust can be set up so a trustee manages distributions, adding layers of control and protection.
  • Protective measures can prevent issues from immaturity, substance abuse, divorce, or creditors.
  • Staggered Distribution Example:
    • 1/3 at age 25, 1/3 at 30, 1/3 at 35—allowing for corrective experience* if the beneficiary squanders earlier gifts.

2. Choosing Distribution Ages, Flexibility, and Optionality

(03:39) Thomas and Dave Discussion:

• Age Matters:
  • The younger the children, the more parents usually value “optionality and flexibility.”
  • Thomas: “The younger you are and the less you know your kids, the more you probably want to extend this to be at a later age.” (03:44)
• Evolving Circumstances:
  • Revocable trusts can be adjusted as kids age, showing the importance of regular review.

3. The Risks of “Too Much, Too Soon” & Behavioral Incentives

(04:02–06:09) Dave’s Mulch Story & Incentive Trusts:

• Anecdote on Motivation:
  • Dave’s dad forced him to move mulch before playing basketball—translating to a broader theme: don’t remove your children’s incentives to work and achieve.
  • “Do you want to just be able to give them money for them to do whatever they want, or do you want to have them earn it?” (04:58)
• Incentive Provisions:
  • Example: Require beneficiaries to present their W-2, and the trust “matches” their earned income, encouraging productivity.
  • Side letters to trustees can guide distributions without making incentives legally binding.

4. Changing Your Mind: Modifying Estate Plans

(06:43) Dave:

• If it’s a revocable trust and the parent/grantor is alive and competent, distributions and terms can be changed at any time.
• “So long as it’s in a revocable trust, you should be able to do that. […] These are things that you can decide in the moment in just making sure that you’re reviewing it periodically every few years.” (07:08)

5. Real-Life Cautionary Tales

(08:27–10:20) Thomas:

• Major Risk: Young adults with lump sums are prone to poor decision-making (e.g., starting a bar, speculative investments).
• Thomas recalls a viral thread:
  • 19-year-old inherits $900,000, puts it all in one stock, and loses a third of it in a week.
  • “You do not want to be handing that amount of money to kids that are at that time overconfident in their beliefs, that have honestly never been humbled in some of that.” (09:33)

6. Choosing a Trustee: Personal vs. Professional

(10:53–14:52) Dave and Thomas:

• Options:
  • Child as own trustee: Offers control but undermines trust’s protections.
  • Family members: Can cause conflict, especially if siblings are appointed.
  • Professional trustees: Offer expertise and objectivity, especially for complex estates or when family dynamics are challenging.
    • Trust companies may allow pre-existing financial advisors to continue managing investments while they handle administrative duties.
• Cost:
  • Professional trustees can charge 1–2% of estate value, but cost is justified if it prevents bigger losses or misuse.

7. The “Goldilocks” Amount: Supporting Without Harming

(16:20) Thomas:

• Citing Morgan Housel:
  • “I want to have enough money to benefit my kids so they can always kind of get through their problems, but not so much where I turn them into pricks.” (16:23)
  • Each child’s needs and ideal “amount” is different; too little can cause struggle, too much can cause complacency or emotional issues.

Notable Quotes & Memorable Moments

• Dave on Incentive Trusts:

  • “I've seen trusts where people have put W2 matching in there, where every year the beneficiary has to present the Trustee with their W2, and the Trustee will match that amount.” (05:31)

• Thomas on Overconfidence Risk:

  • “We have, you have $200 in the market and you're up 30%, right... all these people become ...‘I'm a good stock picker’ when like, they literally know nothing.” (09:01)

• Dave on Professional Trustees:

  • “The more control you give to the beneficiary, the less protection the trust is going to offer.” (11:09)

• Thomas on the “right” inheritance amount:

  • “Not so much where I turn them into pricks is basically what he said…that threshold is different for every single child.” (16:24)

Key Timestamps

| Topic | Time | |----------------------------|-------------| | Introducing Trust Options | 01:36 | | Staggered Distributions | 02:16 | | Incentivizing Beneficiaries| 04:58–06:09 | | Changing Trust Terms | 06:43–07:39 | | Avoiding Heir Pitfalls | 08:27–10:20 | | Choosing Trustees | 10:53–14:52 | | Professional Trustee Costs | 14:04–14:52 | | Balancing Support and Harm | 16:20 |

Tone & Takeaways

The conversation is practical, candid, and brimming with real-world stories. The hosts demystify the technical aspects of trusts, rooting their advice in the human dynamics that make estate planning both an art and a science. Advisors are reminded: Plan for the individual child, expect the unexpected, and prioritize flexibility and periodic review. Avoid making your children’s lives harder—or too easy—and always consider the long-term psychological and financial impact of your choices.

Summary Table: Options for Leaving Assets to Children

| Option | Pros | Cons | Best For | |---------------------|--------------------|-----------------------|----------------------------| | Outright Gift | Simple, common | No protection | Mature, financially savvy | | Discretionary Trust | High control | Complex, costlier | Young/unproven heirs, special situations | | Staggered Trust | Balance of access/protection | May be “too little, too late” | Teens/young adults | | Incentive Trust | Encourages achievement | Hard to “get right” | Goal/achievement focus | | Professional Trustee| Expertise, objectivity | Expensive | Large/complex estates, difficult family dynamics |

Final Note:
Advisors should help clients custom-fit their estate plans, always balancing control and freedom. Regularly revisiting plans is essential as circumstances—and children—change.

End of Summary