Question - My son just received $3 million from an insurance claim. We are wondering what is the best way to handle this money?
Question: My son just received $3 million from an insurance claim. There is just him and his two sons, ages 5 and 8. We are wondering what is the best way to handle this money. Would it be wise to set up trust funds of $1 million each for the boys?
Ric: There’s nothing wrong with that per se, but the question is: What kind of trust? It’s good that you and your son are taking the time to think this through and seek advice rather than making quick decisions.
There are living trusts (which operate when you create them) and testamentary trusts (which become effective when you die). Some trusts are revocable (allowing you to make changes) and some are irrevocable (which cannot be changed). Some trusts are designed to protect the assets of children with special needs who are not expected to ever be able to earn a living or live independently. Others are designed to protect spendthrifts from squandering their money. Still others are intended to shelter assets from taxes, creditors or dilution through marriage, divorce or legal judgments.
So the first step is for you to ask yourself what you want to accomplish.
Perhaps you want the boys to receive the money at a certain age — in a lump sum, in periodic distributions or as a monthly or annual allowance. You might want the money to be used only for specific purposes, like college, buying a home or health care. How will the money be invested before or after it is distributed, and who will be responsible for its management?
Be careful when creating limitations or rules. Clever beneficiaries — or their lawyers — will probably find some way to evade any limitations you establish.
So you and your son need to talk with two people: an independent, objective, fee-based financial advisor who can help you design the overall strategy for managing the assets to achieve your goals, and an estate attorney who can help you devise the trust itself, writing the document in a way that ensures the money is managed the way you intend.