Why Young Families Need a Trust: Protecting Your Children and Your Assets

For many young families with children, the primary assets they own often include life insurance policies and retirement accounts. These financial tools are designed to provide security and support for your loved ones if something happens to you. While it’s common to designate your children as beneficiaries on these accounts, simply naming them is not enough to ensure their long-term protection.

What Happens Without a Trust?

When you name your children as beneficiaries on your life insurance and retirement accounts, those assets typically pass directly to them upon your death. Sounds straightforward, right? However, the reality can be much more complicated—and risky.

Once your children inherit these assets, they usually gain full control immediately, often at the age of 18. At that age, they receive the entire lump sum of your life insurance proceeds and retirement account balances outright, with no restrictions or oversight. This can be problematic for several reasons:

• Lack of Financial Maturity: At 18, most young adults are still developing financial skills. Suddenly receiving a large sum of money can lead to impulsive spending or unwise investments.
• No Structured Support: Without a trust, there are no provisions to ensure your children use the money for important milestones, like education or purchasing a home.
• Tax Implications: Retirement accounts, in particular, can come with complex tax consequences if not managed properly. Your children may face significant tax burdens if they withdraw funds too quickly or without guidance.

How a Trust Protects Your Family

Creating a trust to hold your life insurance proceeds and retirement accounts can provide a layer of control, protection, and tax planning that beneficiary designations alone cannot.

• Controlled Distributions: A trustee—someone you appoint to manage the trust—can distribute funds according to rules you set. For example, your children might receive money only after reaching certain ages or achieving milestones such as graduating from college.
• Asset Protection: A trust can shield these assets from creditors, divorce settlements, or poor financial decisions your children might make.
• Tax Efficiency: A knowledgeable trustee can manage retirement account withdrawals to minimize tax liability and maximize the benefit to your heirs.
• Peace of Mind: You can rest assured that your children’s inheritance is managed responsibly, protecting their financial future in the way you intended.

The Bottom Line

You purchased life insurance and contributed to retirement accounts to protect your family’s future. Without a trust, you may not be fully protecting your children or your assets. Creating a trust ensures that your legacy is preserved, your children’s needs are met over time, and your financial gifts are managed wisely.

If you’re a young parent, take the time now to consult with an estate planning professional about establishing a trust. It’s one of the most important steps you can take to safeguard your family’s future.