Different Ways to Space Out Inheritance Distributions

If a person dies in California without a will or trust, the California Probate Code decides what happens to their estate (i.e., all their earthly possessions). Under the Probate Code, if the decedent (legalese for “the deceased person”) had children, then the children inherit their share as soon as probate closes (which could take a while – after all, it’s the government). If the children are under the age of 18, then the money is held in trust until their eighteenth birthday.

If you’re like me, then the idea of someone inheriting a lot of money at 18 doesn’t sit well with you. One of the big reasons for having a trust is to avoid this problem by deciding what age is old enough for an outright distribution.

A trust can go beyond merely setting an age limit, though. If the child is under the age you specify, you can set other conditions or terms on their inheritance.

The most popular method of distribution is called “three strikes.” With this method, the child’s inheritance is spaced out so that they receive three distributions, at three different ages. For example, let’s say that you set the age limit at 25. If the child is 26 years old, he or she gets an outright distribution of his or her full inheritance. If the child is 23 years old, then he or she would get a distribution at ages 25, 30, and 35. It’s called “three strikes” because it gives the child three chances to do something smart with their inheritance. (A variation of this is to give everyone three distributions regardless of age, with one distribution immediately, one a few years later, and the last distribution a few years after that).

Another method is called “matching income.” With this method, the trust will match the child’s annual salary (or the spouse’s, if the child is married). This method gives the child an incentive to get a job, and (hopefully) become a productive member of society. The trust can also include an end date, where any money left goes to the child outright, and the trust can close.

These are the most common methods, but there is plenty of room for creativity. The courts have ruled a person has (almost) absolute discretion on what conditions they put on an inheritance.

Do you have a question about choosing the best estate planning option for your family? Contact me today to schedule an appointment and get your inheritance questions answered.