An Installment Trust is a type of trust where the assets in the trust are disbursed in installments based on the age of the recipient. For example, a typical payment schedule is to pay the trust property to the beneficiary in three installments. The trust gives the beneficiary one-third of the trust at age 25, one-half at age 30, and the balance at age 35.
There are 3 roles in an Installment Trust:
- The Settlor – the person creating the trust
- The Trustee – the person responsible for investing and protecting the trust property until it is paid out to the beneficiary
- The Beneficiary – The person who will receive the assets of the trust
So in an Installment Trust, the settlor sets up a trust for the beneficiary and the trustee manages the assets and then gives them to the beneficiary at certain triggering events.
The settlor typically also gives the trustee the discretionary power to pay Trust income and principal to the beneficiary at any time, if needed, prior to the set distributions. These discretionary payments are typically limited to certain goals, such as education, health, maintenance, and support.
When is an Installment Trust appropriate?
An Installment Trust is appropriate for clients who want to eventually leave property outright to their children, but don’t want to give it to the children while they are young. For instance, if you pass away when your children are ages 6 and 8 and leave them money outright, two things happen. First, the court has to oversee everything that goes on with the funds while the children are minors. Second, at the age of 18 they get it all with no strings attached. That can be a disaster. Picture an 18 year old with all of your money to spend freely on new cars, boats, gambling, risky investments, parties, and gifts for a girlfriend/boyfriend. The priorities the child has at age 18 are not likely the ones the child will have at age 30 or 35. For most people, their child’s fiscal immaturity is a problem. One solution is to use an Installment Trust to allow them to delay when the child gets the funds, but then ultimately give the funds to the child at a more mature age. For certain clients, that’s exactly what they want.
Are there other scenarios when an Installment Trust is appropriate?
An Installment Trust can also be combined with certain goals that the child must attain before becoming entitled to payment, such as completing college or remaining drug and crime free. These added conditions are known as Incentive Trusts.
Are there any potential downsides or times when an Installment Trust is not a good idea?
Like all types of trusts, an Installment Trust has a specific purpose – to delay control of the property until the child is mature enough to manage it. If a client is concerned about a child having creditor problems or losing property in a liability lawsuit or divorce settlement, or if the client wants to ensure the money stays in the family after the child’s death, an Installment Trust might not be the best choice. An Asset Protection Trust or Transparent Trust is more suitable for these situations. Yet, for many parents, an Installment Trust is an ideal solution to protecting property for young children until they become mature enough to use it responsibly.
As you can imagine, there are many potential future situations to think through when drafting an Installment Trust. At Cipparone & Zaccaro, we have over 75 years combined experience in estate and trust planning. Call (860)442-0150 today to learn how we can help you.
