In our previous sub-trust blog, we discussed all the essential information about this valuable estate planning tool. This post will highlight one of the most common sub-trust types, the age-restricted trust.

What are Sub-Trusts?

If you don’t already know, a sub-trust is a revocable trust that a trustor (or grantor) creates for a specific purpose. A sub-trust works within the limits of a main trust. Thus, a sub-trust is also called a secondary trust or a trust within a trust.

Sub-trusts provide significant estate planning benefits when used properly. The proper use of sub-trusts begins with knowing the type of trust you need for your specific goals and purposes.

What is an Age-Restricted Trust?

Of the many trust types that are used as a sub-trust, the most common is an age-restricted trust, also called age trust or trust for minors. An age-restricted trust, as can be inferred from its name, is a trust that provides limits based on the age of its beneficiaries. When created under a larger trust structure, the age-restricted trust becomes a sub-trust that can specify the ages or milestones at which the beneficiaries can access the trust’s assets.

The primary goal of this sub-trust is to ensure that minors or underage beneficiaries receive their inheritance at the age determined by the trustor to be mature enough to manage the asset(s) properly. Thus, an age-restricted sub-trust protects the trustor’s assets from mismanagement or being squandered by young beneficiaries.

Components of an Age-Restricted Sub-Trust

The age-restricted sub-trust is similar to a standard revocable trust and has the following key components:

Trustor or the person who creates the trust and whose assets are placed into the trust.
Trustee or the person or entity who manages the trust and ensures the distribution of assets according to the trust’s terms.
Beneficiaries or the minors and young individuals (typically children or grandchildren, but can be non-relation as well) for whom the sub-trust is created. They will receive the sub-trust’s assets in stages based on their age.
Terms of distribution or the specific ages or milestones at which the beneficiaries can access the assets. Common ages are 18, 21, 25, 30, etc.

Benefits of an Age-Restricted Sub-Trust

The following are the benefits to expect when you set up an age-restricted sub-trust:

Low risk of mismanagement

Beneficiaries at a more mature age are less likely to mismanage the trust’s assets. As children grow older, they acquire more experience and skills in handling financial matters. An age-restricted sub-trust can restrict the beneficiaries’ access to the bulk of the assets until they are older and have a lesser chance of mismanaging said assets.

Encouraging education and responsibility

Age restrictions on their inheritance help encourage young individuals to pursue education or build careers and take responsibility for their lives. Knowing that they will get funds to support their life goals, albeit at a later date, will motivate them to better themselves in preparation for that future.

Protection from creditors and divorce

Age-restricted sub-trusts can protect the trust’s assets from creditor claims in cases when beneficiaries, at any age, acquire debts or similar liabilities. It can also prevent the division of assets in cases when the trustor or the beneficiaries undergo divorce, ensuring the assets stay intact and under the trust’s ownership.

Tax benefits

Assets under a trust’s protection have tax advantages, and assets under an age-restricted sub-trust are no exception. Under this sub-trust, income taxes can be deferred on some asset earnings meaning the trust receives earnings in full amount without tax deductions. In addition, by segregating some assets into sub-trusts, the total taxes for the entire estate can be reduced.

Considerations Before Creating an Age-Restricted Sub-Trust

The following are the potential drawbacks when setting up age-restricted sub-trusts that you will want to discuss with an experienced estate planning attorney:

More complex and additional cost to create

Setting up an age-restricted sub-trust may involve complex procedures, which are best left to an estate planning professional. Make sure to consider the legal fees, trustee fees, and ongoing costs needed to set up and maintain this sub-trust. Keep in mind that these costs depend on your particular situation, estate size, and other factors. Perform your research thoroughly and consult with experts regarding the specific steps, timeline, and costs of your particular age-restricted sub-trust.

Potential for disputes

If not properly set up and managed, age-restricted sub-trusts can promote discord among the family and social relationships of the grantor. Make sure to discuss your terms with your trustee and beneficiaries before you set your age-restricted sub-trust. Consult with a qualified and experienced legal professional to identify the best terms to deal with these potential disputes.

Sample Uses of Age-Restricted Sub-Trust

A father with a thriving business sets up an age-restricted sub-trust for his two children under the umbrella of his main trust. The sub-trust stipulates that the children would receive one-third of their inheritance at age 25, another third at age 30, and the remaining third at age 35. Thus, the father ensures that his children receive financial support while encouraging them to develop their careers and financial management skills before receiving the full inheritance.
A widow with substantial assets creates an age-restricted sub-trust for her grandson. She specified that her grandson can access funds for his education expenses at any age but receive portions of his inheritance at ages 22, 28, and 35. This trust structure provided the grandson the means to pursue higher education and established milestones for accessing his inheritance.

Proper Sub-Trust Planning and Implementation with Rilus Law

Proper planning and implementation are the keys to an effective sub-trust that is worth its cost. It is critical that you carefully look into your situation, goals, and your beneficiary needs. Only then can you set up and implement the specific terms that will fit your trust requirements. For expert help with these tasks, give us a call today to schedule a free consultation with our experienced estate planning attorneys!

Types of Sub-Trusts: What is an Age-Restricted Trust?