How to Leave Assets to Children & Minors

Summary

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

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

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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.

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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.

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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)

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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 |

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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.

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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 |

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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.

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End of Summary

Transcript

[A]

Foreign. Hello and welcome back, everyone, to another episode of the Practical Planner podcast. I'm your host, Thomas Coleman. Here with me, Dave Haughton. And today we're going to do part two of a series. So if you didn't listen to the last episode, what really, what we really talked about is kind of different ways to benefit and plan for your kids. And so this was 529s UTMA taxable accounts and just different ways to help set them up. In this episode, what we're really going to talk about is, you know, you start to using trust. And so I think, you know, Dave can attest to this. I can attest to it. As people start to, you know, build a lot of wealth, they start to leverage trust. And a lot of times leveraging this trust is for estate tax purposes. But there's also times, you know, this can apply just to using revocable trust. And inside of these trusts, you're going to have different rules of, you know, know how and when, you know, the children are get assets, what assets, et cetera. And so this, this episode is going to be all about how do you choose, you know, what to do. And I think, you know, the options are endless. You know, I think this is where we all grew up kind of hearing about trust fund kids, right? And this is the, the lane we're going to go down where some people got it 18, some people get it at 30, some people get it yearly, some, you know, you can't fully take it till 40. But if there are special things like health or, you know, buying a house, etcetera, you can use it. So, Dave, I'm curious from you. You know, I want to hit on all of the options, but, you know, maybe you can start to go through some of them and what you most commonly would see.

[B]

Yeah, absolutely. Yeah. I mean, when you're using a trust, there's like you're saying there are pretty much endless options depending on how creative you want to get with how you're leaving the property. But the most common is going to be you're leaving it outright and free of trust. That literally just means that when you pass away, 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. Second, there's, you could leave it in trust. Now, how that trust is structured are a number of different ways you could leave it in trust where a trustee manages it and the trustee determines when and how much money to give to them, the beneficiary might have to submit reasoning or, you know, expenses to show why they should be giving trust distributions. That's obviously a much more restrictive way to go about it. But it's, it's much more protective for a lot of things like from divorce, from creditors, obviously from themselves if they're having maturity issues or substance abuse or whatever the case is, gambling, you can protect the beneficiary. And then, you know, another very common way to leave, it would be staggered either by age or over a term of years. So for example, you leave property to a child, it'll say they get one third at age 25, 1/3 at age 30 and 1/3 at age 35. And that's really just a great way to, you know, if you feel that you're not sure what their level of maturity is, you're going to give them tranches to give them the chance that if they mess it up the first time, they'll have more coming to be more mature and not get it all at once and potentially have a windfall that they don't use or manage properly.

[A]

So how do you think about this? Like how. Let's start with if you're doing this for your kids, how would you do it?

[B]

You know, it's tough because my kids are really young. I have a two year old and a six year old.

[A]

So I think that changes things. Right. I think the younger you're doing this, I think the more you're gonna pick the route of optionality. Right. I think in our last episode we talked a lot about flexibility and I think 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.

[B]

Absolutely, yeah. Or, or flat out discretionary by a trustee. And you know, I tell this story sometimes because I think about, you know, when you have a trust or an estate that you're leaving property to children and if you die prematurely, you could actually be inhibiting them by leaving them too much money, inhibiting their motivation to kind of make their own way to not rely on the trust funds and kind of sit back and, and rather than keep grinding. And so, you know, when I was younger, I used to love to play basketball. And so I'd be out my driveway, I'd be pretending to be, you know, my favorite basketball players, Michael Jordan, whoever. And every year the mulch would get delivered. So big heaping thing of mulch. My dad would always put it directly under the basketball hoop.

[A]

So you had no choice but to.

[B]

Do it yeah, well, you basically say is, like, you want to play basketball, you got to move that mulch. You know, you leave it there as long as you want, but you can't play basketball. And so I'd have to, you know, wheelbarrow all the mulch and spread it all. And I think about that sometimes in the terms of estate planning is do you want to just be able to give them money for them to do whatever they want, or do you want to actually have them earn it? So there's, you know, creative ways you can go about it. There are certainly downsides to it. But, you know, 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. So the more that you make, the more trust distributions you get. So there's a lot of creative ways that you can go about incentivizing beneficiaries. And it doesn't necessarily have to be really formal in the trust language. You could keep it like a discretionary trust and just have a side letter to the trustee telling them what your wishes are so that they're not legally bound by that standard, but they have an idea of what way to go with it. So, yeah, ideally, I wouldn't want to leave my children money that demotivates them from making their own way.

[A]

Yeah, I definitely wouldn't choose 18 or 21, personally. Like, I think at the earliest in my mind, I would do like 25 with maybe a special provision, like, you know, maybe starting a business or maybe buying a house or something like that. You have the ability to do it. But, you know, I think you. I again, I think that flexibility route of like, let's see what life looks like. But let's see. Say you did that right. You started with it. You set it up at 50% at 18 and 50% at 25. And you're like, absolutely, I want to change that. Can you. What does that look like?

[B]

Yeah, I mean, if you're still alive, you have capacity. It's a revocable trust. You can change it at will. So you could start out more restrictive. As you see, they're getting older and more mature, or maybe their motivations and their career path is coming into focus. You can change that to give them more free access or obviously the other way around to limit the access more. So long as it's in a revocable trust, you should be able to do that. That doesn't mean you're completely out of options, even if it's an irrevocable trust, it's a little bit more difficult. But while you have lifetime, while you have capacity, these are things that you can decide in the moment in just making sure that you're reviewing it periodically every few years just to see how it's being left. Is that appropriate for that particular child, or do you want to either put more restraint or open it up a little bit?

[A]

Yeah. And I think as a financial advisor, like, stories are really helpful and even just talking through, like, hey, you know, we've seen this negative side happen because I think, you know how I see with people with their own business or equity comp or the kids, whatever. Like, we all think the perfect end is coming, right? Like, our kids are going to be great. They're going to make the right decisions, they're going to do the right things. And at the end of the day, like, you know, I hope you think that about your kids, especially, you know, when they're young and stuff. Like, I hope you think that they're going to make all the right decisions. But everybody, you know, mostly thinks that. And so, you know, if we can help steer them towards the side of, like, well, let's, let's have the optionality to potentially not do this just in case things look different. Because if you give them all the powers and things go the wrong way, you're going to end up really regretting it.

[B]

Absolutely. Yeah. I mean, I think about a lot and I've seen it, you know, someone inherits a million dollars at a young age, what do they do? They open a bar. What happens with that bar? They don't know how to manage it. All that money's poof, gone. They don't have another bucket of money coming. You know, they've just. They've just. All the wealth that you accumulated over your lifetime, they've just wasted.

[A]

Yeah. And I think, you know, maybe we can on the video, this, pull up the tweet. But about a week or two ago, there was something going all over Twitter and social media. This kid posted that, I think he was like 19 and he got like $900,000 he inherited and he put it all in one stock and it became worth $600,000 in a week. And he's like, I don't know what to do. I can't tell my parents, you know, do I sell and take this loss? Do I hold on and wait for it to bounce back? And obviously you don't want to be reading through Reddit to get your advice because you're going to have. The people are like, oh well, it's down. You got to wait for it to come back. But like, as we all know, the vast majority of stocks never go back to their all time high. Then you have the other side that's like, let's sell and take this loss and reallocate. And that's, you know, not giving advice. Obviously that's probably the better decision in that situation. But I remember being in college and all of my friends talking about investing, right? And it's really funny. Like, you know, we have, you have $200 in the market and you're up 30%, right. And like, you know, that $40 position is now worth, you know, $50. Like that's really cool. And it might give you some confidence. And all these people become, oh my gosh, I'm a good stock picker. Like I know what I'm doing. When like they literally know nothing. They just picked a random company that they thought would be good because they read something about it. But like, 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. And so I would definitely steer clear of giving them the ability to make that decision. Because it's one thing to lose a couple hundred dollars, it's another thing to lose a few hundred thousand dollars.

[B]

Absolutely.

[A]

So I think maybe last thing in this episode to talk about is trustees. So you know, in some of these you're going to have to have some sort of trustee. You know, we talked about the ones where somebody oversees it. You can approve that. You know, I've worked with clients that are younger that, you know, they have to get approved from the trustee to do X, Y and Z. I even have a client who manages a very large trust for a client because of a business partner. How do you pick the right person? Or, and then maybe after that, what if you don't have the right person? Because there's people who don't really have other family and there's professional trustees, etc.

[B]

Yeah, I mean it's, it's not always the easiest decision because you are managing a few different competing concepts there when you're naming a trustee, especially if you're dealing with family members. Right. So number one, you could have the child be their own trustee or their own co trustee with someone just to let them have some control. But you know, the idea is that the more control you give to the beneficiary the less protection the trust is going to offer. So, you know, if I name my child as trustee and beneficiary over their trust, it's essentially smoke and mirrors. It does offer some protections, like sometimes for divorce, but that's not gonna be the best way to go about things if you're looking to exercise some control. So then you're gonna look at other family members. Do you want a sibling managing the trust for their sibling? How awkward could that get? You know, is that uncomfortable? Is that the best way to avoid conflict? Probably not. So it's all gonna depend on family dynamics. Then you're gonna wanna look at, you know, the financial sophistication of that person. Obviously. Do they know what they're doing? Are they going to make the appropriate decisions? Pick the right, you know, financial advisor to invest this money? Are they going to know what the right expenditures are, Making sure that the taxes are reported appropriately and everything? So someone, you know, you don't have to necessarily be an estate planning attorney, a financial advisor, a CPA to be able to be a trustee, but you have to have some financial acumen, I think. And, you know, if you come to a point where I can't think of anyone in my family that could do that, or if I do think of someone in my family, I think it's going to cause a lot of stress and awkwardness. That's when you look towards professionals and, you know, they have trust companies that will act as, as trustee and they do it the way that they, they manage the property is very emotionless compared to a family member because they're going to be looking at the trust standards. So it says the trust can pay out for health, education, maintenance and support. Let's say if someone said that they needed a distribution, that trust company is going to have a manual that is going to tell them what kind of expenses fit into each category. So they're not having an emotional decision when they're exercising discretion. And you know, the other thing I wanted to mention from the advisor perspective when it comes to those trust companies, a lot of these trust companies are in the business of obviously of investment management. So they want the assets to invest them. There are, however, a lot of trust companies that will act only in the role of administrative trustee and they will permit the financial advisor to continue to invest the money on behalf of the family. So, so that's really good thing to look into is not just look at who is going to be the trustee, but also what are their motivations? Are they going to let my financial advisor Continue to manage the money and just serve as that trustee role, really, when it comes to distributions.

[A]

Yeah. And it's something that can get pretty expensive too, Right. Like, even on the administrative side, like you can. There are some that will do flat fees. There'll. Some they'll like, potentially do hourly. But a lot of times they, they charge a percent of the estate value. And especially if anybody's truly managing the investments, they're definitely charging 1 to 2% in most times of the estate value. So the expense is there. But, you know, if we go back to the last person, right. If a trustee was managing the $900,000 for a young child, like that kid probably was set up to never have to invest for retirement. Right. If you have, at 19 years old, $900,000, you. You don't have to take a lot of risk. Right. You have 30, 40 years to let that grow and compound. They don't look at it through that lens, but there's a cost. But again, like, if it helps get to a better outcome, like that cost is probably worthwhile.

[B]

Yeah, absolutely. I think, you know, a lot of times when it comes down to these decisions, when it's in estate planning, you're thinking of cost efficiency, tax efficiency versus control. And you can't always get the best of all worlds. Sometimes you got to decide, you know, which way am I going to go with it? Because if I give it to this kid outright and I don't pay what I probably should for the professional services, they're going to go through it a lot quicker and waste it a lot more than that cost I would have paid to manage it.

[A]

Yeah, true. Okay. Anything else you think that we need to talk about on this topic?

[B]

I don't think so. I just, I just think it's just such a critical decision point when people make their will or make their trust, that they're thinking about these things and they're not just saying, okay, I've got a pot of money. I know the percentages, I wanted to get split. They need to think a little bit more and think about, okay, I die tomorrow, this money gets dumped on my children. Am I okay with that or do I want to put some restrictions in there? Do I have concerns just to make sure that they're setting their children up for success, really? Not, not necessarily, you know, worrying about the money, it's one big thing, is not demotivating the children or making a problem worse. Right. If someone has a substance abuse issue or gambling problem, you're making their problem actually worse by giving them a lot of money.

[A]

It's funny, I was literally just going to go into that afterwards too is, you know, the Morgan Housel quote where, like, I want to have enough money to benefit my kids. So, like, they kind of have, you know, they can always kind of get through their problems. They don't have to worry about it, but not so much where I turn them into pricks is basically what he said. And like, you know, that threshold is different for every single child. And so not only is you have to think through, like, how much can I give these kids? Like, because we all see it's kind of the idea of, like, the really successful young kids, right? If you look at the Disney actors or all these other people, like, a lot of times when you've made it at a really young age, you have to think about working hard or earning money. Like, you don't really have this thing that you're focused on building towards. And most times you end up pretty unhappy. So, like, you don't want to push your kids into this where, like, oh, well, I've never had a thing about money. It doesn't really matter. I'm going to spend every dollar. And like, a lot of times that leads to some mental health issues. But you also don't want to be like, I have so much money, I'm not going to help my kids in any way either. Like, that can cause a lot of issues as well.

[B]

Absolutely.

[A]

So, all right, everybody. So this was, you know, part two of, you know, helping your children. I think this is a really important part, too. One is figuring out accounts, things you want to cover. The other part is like, how do we set this up at the right ages where we limit issues? But thank you guys again for listening. If you guys have any topics or questions that you want us to answer or talk about, feel free to submit an email, but please rate and subscribe and we'll see you back in a couple weeks.