Can My Child Serve as Trustee of Their Trust Share and Still Have Protections?

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trusts and trustees

Reviewing my Trust Documents and Wondering if My Child Can Serve as  Trustee of their Trust Share?

Yes. Your child can serve as trustee of their own trust share. Our estate planning attorneys highly recommend familiarizing yourself with the details involved though.

Clients often include one or more trusts in their estate plans to insure that, if they pass prematurely, their assets are set aside to pay for their children’s health and education. A typical “minor’s trust” places the assets in a trustee’s care, and gives the trustee sole discretion to distribute the assets for a child’s health, education, maintenance and support until such child attains certain specified ages (i.e. 25 or 30).

During the estate planning phase, clients are asked who they want to name as trustee of these trusts. Young parents often provide a quick response along the lines of “my brother” or “my husband’s sister,” or even “my parents.” For many couples in their twenties and early thirties, the thought of them passing before their children are grown is unthinkable and therefore not much serious thought goes into choosing a trustee.

However, clients may want to give greater consideration to whom they will appoint in this very important role; if not initially, then at least the issue should be re-visited periodically as family and/or financial circumstances change.

Concerns About Creditors If My Child Serves as Trustee

One note, however, that the general rule is that a creditor or “predator” may be able to “step into the shoes” of a child in order to enforce a judgment or claim. Once in the shoes of the child, the creditor or “predator” can compel the child to exercise any rights held by the child over the trust assets. For example, if the trust permits the trustee to make distributions of trust income or principal to the trust beneficiary in the trustee’s “sole and absolute discretion,” and the child is the sole trustee and sole beneficiary, in many states such broad language might make those assets available to the child’s creditors.

More protective provisions would limit distributions to the certain things, such as “health, education, support or maintenance.” But even the more seemingly restrictive language is quite broad, as “maintenance” means a distribution necessary to help maintain your child’s standard of living. Distributions for a house, a car, travel could all be included as distributions for your child’s “maintenance.” Also, if your child is named as the sole Trustee of his trust and the trust allows the Trustee to make distributions of income and principal for your child’s support, a creditor who has furnished goods or services that may be classified as “support’ may be able to “step into the shoes” of your child and make a distribution to satisfy the judgment or claim. Generally, if under state law a beneficiary has a right to compel the Trustee to make a distribution, then the creditor will be able to enforce that right.

Consider a Co-Trustee

To keep this from happening, you may want to name an independent party as co-trustee of your child’s trust. In a serious situation, your child could even resign as Trustee, leaving management in the hands of the co-trustee.

Since the independent Trustee has no connection to the creditor or predator, the creditor or predator is generally unable to “step into the shoes” of the independent Trustee and exercise the right of the Trustee to make a distribution. The reason is because the spendthrift clause will prevent anyone from interfering with the independent Trustee’s discretion in making distributions of trust property from the trust. You can choose to give your child “indirect control” over his trust by allowing him to remove and change the co-trustee whenever he wants.

In conclusion, the degree of protection will depend upon the wording in the trust regarding the Trustee’s discretion to make distributions, who the Trustee is, and the rights of beneficiaries and creditors under state law. Nevada, for example, is one of the most protective states for beneficiaries, even when they are serving as a sole trustee.