This came up just this morning at the office. A client wants to give a portion of his interest in an investment to his children. He wants to put the title in the children’s names. The asset is actually an interest in a Family Limited Partnership. Two of these children are minor children. I told him, “Don’t do it.”

If you have children who are under the age of 18, they are minors. As far as the law is concerned they are incapacitated. They don’t have the legal capacity to enter into a legally binding contract. If you put something of value in the name of your minor child, then who really owns it? The child can’t. This opens up a can of worms.

When you want your children to own something of value, you should name someone to act on their behalf and have them own the asset in a trust. Preferrably an irrevocable children’s trust. As their guardian you can also be the trustee of their irrevocable children’s trust. The trust owns the asset. You control it on their behalf.

In this case, I recommended that the client establish an irrevocale children’s trust. He can be the trustee. He still controls the asset.

The Children’s Trust has a new taxpayer identification number, so the income from the child’s share is reported for tax purposes as if it were the child’s. It’s passed through to the child and he would pay tax on it at his current tax rate. His tax rate is presumably lower than the parent’s. So it may save some tax.

The asset is owned by the Children’s Trust. It will not be subject to any claim, lawsuit, judgment or demand to the parent, as it would be if the parent still owned it.

The asset is not in the parent’s estate. If the parent should die, there is no transfer to be made. The Children’s Trust has a successor trustee. This person would then control the asset for the benefit of the child.

This asset now is effectively owned by the child. Because it is in the Trust it is protected from judgments, lawsuits, creditors and lpredators. It is taxed at a lower rate than if it were owned by the parents. And will not be subject to probate upon the death of the parents.

Irrevocable Children’s Trusts are the most underutilized asset protection and estate planning tool around.

This entry was posted on Monday, March 8th, 2010 at 1:48 pm and is filed under Estate Planning Tips, Family Limited Partnership, Living Trust. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.