Trust Planning for Minors
Minors are not allowed to inherit property directly. Therefore, if no estate planning has been done and property is left to a minor, more than a few problems will be created. The family must apply to a court to appoint a guardian who will be responsible for the assets until the minor becomes of legal age.
Here are just a few scenarios that may result if a minor is left property directly:
- The court-appointed guardian may not understand the heir or the family’s dynamics, causing friction and possible
litigation. - If the court-appointed guardian is a family member, there may be resentment about their control of assets and the decisions made.
- Fees will need to be paid to the guardian, shrinking the inheritance.
- The child will receive their entire inheritance at age 18, when few teenagers are responsible enough to manage significant assets.
- Family Assets will be separated and divided equally in shares to the different children, ignoring the greater need for younger children to have assets to reach adulthood.
Creating a trust for a minor offers a better solution and pre-empts many of the problems associated with guardianship.
What kind of trust should be created for a minor?
The type of trust created depends on the trust’s short -and long-term objectives. If the goal is to create a trust to manage funds for the minor’s support and education, a testamentary trust created under their parent’s last will and testament may be appropriate. The trust takes effect following the probate of the last will. All assets passing through probate designated for the minor are transferred to the trust and managed by the trustee. The trust can exist for as many years as
desired, eliminating the possibility of the minor inheriting a large sum when reaching the age of majority.
We had three children, spaced about four years apart. Before our youngest finished High School, the two older children had received college educations paid for by the family. If we had died, and the assets divided equally, our Joe would have needed to pay for his college out of his third, while the older siblings would be graduated with their full shares.
We typically recommend that all funds be held in a “Common Pot Trust”, to address the fact that younger children need to be supported longer. That would be closer to how we actually used our money to care for raising them.
Can minors with disabilities inherit assets?
A child with special needs who receives government benefits, including Medicaid, could lose their eligibility if they inherit assets directly. Parents or grandparents of such minors should be mindful to only leave any inheritance to the child in a special needs trust.
What about UGMA accounts for minors?
Custodial accounts under the Uniform Gifts to Minors Act, known as UGMA accounts, were created to allow financial
assets to be given to minors. However, once the child reaches the legal majority, they control the account, which can lead to an 18-year-old making bad and expensive decisions.
I spoke to a man who used this type of account to fund his son’s college education. The son never went to college, and
used the money to buy a body piercing shop. Every time he looked at his son, he was reminded of his mistake by the metal in his face.
Trusts Must be funded.
The trustee of a trust only has control of the assets directed into it. For young families, this will often mean having life insurance and retirement benefits payable to the trust if neither parent is surviving. Great trust planning can be defeated
if the trust is left empty because this set was overlooked.
Trusts provide superior protection.
A trust may take more time to set up than other options. However, it is the best way to protect the minor child and the inherited assets. The planning should be done in concert with the overall estate plan to ensure its effectiveness and take advantage of tax benefits.
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