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What is a Minor’s Trust?
A Minor’s trust is a device parents can use to leave property to a child in the care of a trustee until the child reaches a particular age. Typically, the child is entitled to receive a portion, or all, of the trust principal, interest and earnings upon reaching a certain age – 18, 21, 25 or even older.
Why use a Minor’s Trust?
A Minor’s trust is created by the parents in their wills, called a “testamentary trust.” The trust comes into being only upon the death of the parent. The trustee can be an adult relative, adult sibling, trusted adult friend, or a corporate trustee. A corporate trustee is usually the trust department of a bank, but can also be a corporation whose sole business purpose is to act as a trustee.
There are several reasons why parents would create a Minor’s Trust:
One reason is to provide a tax-free way to transfer property and other assets to a minor upon the parents’ deaths. For example, the Internal Revenue Code permits the creation of a minor’s trust for the purpose of avoiding gift taxes. Also called a “2053(c) trust” for the Internal Revenue Code section, the drawback to this trust is that all principal, interest and income from the trust must be given to the child once the child reaches age 21.
If the parents live in Texas, they can use the “Texas Uniform Transfers to Minors Act” to transfer assets to a custodian for the benefit of a minor child. Custodians may be nominated by will, trust, deed, an instrument exercising a power of appointment, or in a writing designating a beneficiary of contractual rights. However, it is important that the proper wording be utilized to effect the transfer: “as custodian for [Name of minor child] under the Texas Uniform Transfers to Minors Act.”
Another reason a parent may create a minor’s trust is to provide resources for the child to attend college, a trade school, or other specialized training. Such a trust can minimize or even eliminate the amount of money a child need borrow to attain education or training beyond high school.
A third reason a parent may create a trust in favor of a child because the child does not have the financial management skills at a young age so as to invest and manage what can be a very large sum of money. The trust can provide resources to help support the child until such time as the child obtains the necessary skills to manage the assets himself or herself.
When must a Minor’s Trust end?
A trust can end at whatever date or age the parent’s desire.
Criteria for ending the trust can include the attainment by the child/beneficiary of a college education, steady employment, attainment of financial management skills, marriage, etc. Typically, a trust ends by the time a child/beneficiary reaches his or her mid-30’s.
If the parents are concerned that the child/beneficiary will never be capable of managing his or her finances, then the parents can consider creating a revocable spendthrift trust which can provide a stream of income to the child/beneficiary, but the child/beneficiary will not exercise any control over the trust assets.