When you’re thinking about a possible future for your child where you’re not around to provide the love, guidance and financial support they might need – setting up a trust naturally comes to mind.
But, how can you best set up a trust for your progeny that will protect them from the mistakes common to young people? A staggered distribution (also called a “tiered” distribution) schedule might be the answer.
What is staggered distribution?
When you set up a trust for your minor child’s needs, you naturally want their guardian or a trustee to have control of the funds until your child reaches their legal age of majority or even turns 21. However, turning over a vast some of money to a young adult can be harmful. They may not be emotionally prepared to navigate the sudden wealth, and they could burn through the money too rapidly.
Here’s a potential way to break out the funds. You can use disbursement milestones, such as:
- Age 18-21: Limited distributions just for education, basic living expenses or emergencies.
- Age 25: A percentage of the trust (e.g., 25-33%) to help with major life expenses such as buying a car or renting an apartment.
- Age 30: Another portion of the trust (e.g., 50%) to support homeownership, investments or career development.
- Age 35-40: The remaining balance, once they have financial maturity (presumably).
This can help you avoid situations where your child ends up “adrift” and without a set of personal goals because they are relying on their trust fund for their support – and situations where people might swoop in and try to take advantage of their generosity.
Trusts can be complicated to arrange, and there can be a lot of details that have to be settled before you can properly fund one. Seeking legal guidance is wise.