I'm a Lawyer: What's the Right Age To Unlock a Trust?
There are so many different types of trusts out there. For example, there are irrevocable trusts, which primarily exist to protect assets and avoid estate tax. Then, there are revocable living trusts geared toward helping families avoid probate.
As every trust is set up with its own purpose in mind, there's no one-size-fits-all answer to when a beneficiary should "unlock" theirs. And in fact, the idea of unlocking a trust might not even be what you think.
Here's what unlocking a trust really means and how to know when your heirs should receive theirs.
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What It Means To Unlock a Trust
To begin with, the beneficiary isn't the one who unlocks a trust. Nor can they terminate or dismember a trust once it's been created.
According to Evan H. Farr, certified elder law attorney and retirement planner at Farr Law Firm, P.C., unlocking a trust is up to the person who established it, called the grantor or settlor. In an incentive trust, the trustee releases payments to the beneficiary when a condition is met. Otherwise, it's usually when the person receiving the funds reaches a specific age. Often the money is released in stages.
Basically, the beneficiary can't change the trust beyond its original terms. Depending on how the trust is set up, the trustee (person managing the trust) may have some leeway as to when and how distributions are made — and under what circumstances. Sometimes, the trust mandates distributions under its own rules.
The Right Age To Unlock a Trust
If you're trying to decide on a specific age, ask yourself: What's your reason for setting up a trust in the first place?
"Ultimately, the correct age or whether to allow the beneficiary to have full access at all will depend upon what you were trying to achieve with the trust," Farr said. "I will say most people I draft trusts for pick age 25 as the age at which the trust is 'unlocked' and the assets given to the beneficiary or turned over to the beneficiary as trustee of that beneficiary's own trust. Age 25 is because that's when science tells us the brain has 'fully developed.'"
Oftentimes, the grantor won't set just one age but rather a series of ages for distributions. This means the beneficiary won't automatically receive full access on their birthday. Instead, they'll receive their inheritance over time in percentages.
"I've seen success with doing a certain amount or percentage at different age milestones. For example, the beneficiary will get 5% at 18, 10% at 25, etc.," said Jaymon Meikle of Gertsema Wealth Advisors. "The design is to give the beneficiary more of the money once they're older and hopefully more mature."
But what about if you're concerned your beneficiary will become overly reliant on the trust income? Meikle said some grantors will set it up so they receive only the income they've earned.
"So, if the beneficiary earns $50,000 from work, then the trust will match $50,000," he said. "The beauty of a trust is that it allows the people creating the trust to have control over the money, so it's a chance to get creative if the situation calls for it."
Consider This When Setting Up Distributions
The median size of a trust fund is approximately $285,000, as per the Federal Reserve. That's a significant windfall for anyone on the receiving end. But while establishing a trust fund is a great way to secure your family legacy — and financially protect your loved ones once you're gone — it's not always easy to set them up right.
Mark Costley, attorney at Clarity Legal Group, suggested considering the following when deciding when (and how) to distribute assets:
Does your beneficiary know how to manage, invest and protect their wealth?
Once the trust's assets are in the beneficiary's name, they become vulnerable to lawsuits, creditors or future divorces. Keeping the funds within an asset protection trust can protect your legacy for life.
What is the goal of the trust — opportunity or security for the beneficiary? Keeping the money in the trust (rather than distributing it) can give the beneficiary greater long-term security than setting up a lump-sum payout.
"In my experience, the most common mistake people make when establishing trusts is to treat outright access to the trust assets as the primary goal, without stopping to ask themselves whether outright distribution is actually the best option," Farr said. "For many families, a trust that remains in existence for the lifetime of the beneficiary — with appropriate restrictions — provides a better means of preserving family wealth, protecting against future risk and honoring the wishes of the person who created the trust."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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