Disclaimer:  This information is for general informational purposes only and does not constitute legal, tax, or fiduciary advice or create an attorney-client relationship. Estate planning outcomes depend on individual circumstances and may change with future events or changes in law. Readers should consult qualified professionals before implementing any planning strategy.

 

 

Structuring an Inheritance for a Child

There’s more than one way to leave assets to your children. Some parents prefer the simplicity of giving everything outright, while others choose a trust to add structure and long-term protection. The chart below walks through how each option affects control, creditor protection, taxes, and what happens to any remaining assets.

 

Outright Inheritance

Overview: Assets pass directly to your child, either right away or when your child reaches a certain age. At that point, the assets belong to your child outright, with no further conditions or controls.

​

Key Features

• Simplicity: No trust administration, separate records, or ongoing filings.

• Full control: Your child may invest, spend, gift, or dispose of the assets as they choose.

• Tax reporting: Assets are held under the child’s Social Security number and are included in the child’s taxable estate for estate tax purposes.

 

Potential Considerations

• Creditor exposure: Assets may be  subject to claims arising from divorce, lawsuits, business liabilities, or accidents.

• Loss of family control: If your child dies, remaining assets pass according to the child’s estate plan (or state law), which may result in assets passing to a spouse, new spouse, or others outside the family.

• No guardrails: There is no legal structure to encourage long-term stewardship or preservation

 

In Trust (Child as Trustee) 

Assets are held in trust for your child’s benefit. Your child serves as trustee (upon attaining a designated or mature age), managing the assets subject to fiduciary duties and the terms of the trust, rather than owning them outright.

​

Key Features

• Continued structure with flexibility: The child, as trustee, has broad discretion to invest for income, growth, or a balanced strategy, but must do so prudently and in accordance with fiduciary standards.

• Permitted distributions: As trustee, the child may distribute income or principal for the child’s health, support, maintenance, and education, consistent with the child’s standard of living.

  • Health — medical expenses and insurance

  • Support & maintenance — housing, food, clothing, insurance, utilities, and transportation

  • Education — tuition, training, and related educational expenses

• Enhanced asset protection: Trust assets are generally insulated from creditor claims, divorce proceedings, and lawsuit judgments.

• Preservation of family legacy: Remaining assets pass to bloodline descendants. Your child may direct distributions at death only among your descendants, unless you intentionally expand this power to include others, such as a spouse or charities.

Administrative and Tax Considerations

• Separate administration: Trust assets must be segregated and maintained under the trust’s separate EIN.

• Tax reporting: The trust must file an annual Form 1041. Income may be distributed to the beneficiary to avoid higher trust tax rates.

​