Question:

I have a 20-year-old daughter who goes through money pretty quick. I have decided I can’t lay $1-1.5 million on her at age 21-23. (I’m terminally ill.) How much should I expect to pay for a trust that gives her $50k a year for say 20 years if I have a large bank control the trust and write one check a year. Or say $5k a month and they send a monthly check for 20+ years. I live in Missouri if that matters. Also, if she gets married, is her husband entitled to half of that?

Response:

I’m sorry to hear about your illness.

A bank or trust company would typically charge between 1.0 and 1.2 percent per year. So, depending on the size of the trust and what the institution charges, the cost could be anywhere from $10,000 (on $1 million) and $18,000 (on $1.5 million) a year. Any bank or trust company could tell you what it would charge and if there are any ancillary charges, such as for the trust’s annual tax return.

Your daughter’s future spouse may well be entitled to half of the monthly or annual stipend, or it could affect what, if any, alimony or child support he might have to pay your daughter upon divorce. This depends on a number of factors, including the length of the marriage, Missouri law (or that of any other state where they might get divorced), whether they have a prenuptial agreement, and both parties’ other income and resources.

But even if the income might have to be shared, or its existence might affect your daughter’s other rights upon divorce, the principal of the inheritance should be protected—at least, if the divorce occurs during the existence of the trust. If your plan is to distribute the remaining funds after 20 years, assuming your daughter will be financially responsible by the time she reaches her 40s, such funds will no longer be protected.

Your question raises other issues and various possible solutions, including:

• Why not have the trust continue for your daughter’s lifetime? That way it would never be subject to claim upon divorce or by your daughter’s creditors.
• The $50,000 a year or $5,000 a month could be eroded by inflation. In addition, it could become relatively small in proportion to the assets in the trust if they were to enjoy robust growth. This may be fine, since over time your daughter may be expected to earn more and more of her own keep. On the other hand, if there was another downturn in the market, the monthly or annual distributions could become rather large in proportion to the investments and begin to erode the funds in the trust. One solution would be to pay out all the trust income—dividends and interest—rather than a specific monthly or annual amount.
• One issue with a trust that only distributes income, and requires such distribution, is that the trustees have no discretion to make changes depending on circumstances. With regard to income, you might want to give the trustees the right to withhold or use it on your daughter’s behalf rather than distributing it to her if they deem that to make more sense. You could give them guidelines for this determination. For instance, you might want the trustees to pay for your daughter’s health insurance premiums, rather than leaving this up to her.
• Additionally, you might want to give the trustees discretion to dig into principal when needed. You could restrict this to particular purposes, such as for the downpayment on a home or for extraordinary medical expenses. To the extent you do give the trustees discretion, you might provide them with guidance in a separate memorandum explaining in more detail your reasons for the trust, your values, and how you would like the trust funds to enhance your daughter’s life—in essence, how you would support your daughter if you were there.

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