How a “minor’s trust” can help inheritance management

A minor’s trust is a type of trust that’s designed to manage and protect assets for a child until they reach a specific age.  The assets in the trust are in the care of an adult named as trustee until the child reaches the age designated in the trust which is usually age 18, 21, or 25.  An end-date for the trust can also be tied to a specific event or milestone such as graduation from college.

While you can select any age as the end-date for the trust, age 18 is a minimum because children younger than that are not legally permitted to control their own property. A reasonable maximum age would probably be in the early to mid-30’s. By this age, the person’s maturity level is such that they should be able to handle financial responsibilities.

Setting up a minor’s trust provide several advantages when it comes to wealth management. Assets in the trust will pass to the beneficiary by contract vs probate court, avoiding unnecessary costs and time. The assets held in the trust can continue to grow and earn money for the benefit of the beneficiary. 

How it works

A minor’s trust is usually established by parents or relatives who want to leave assets to a child, but want to name a trusted adult (trustee) to care for those assets until the child is old enough to be financially responsible. Trusts for minors can be established within a will or living trust.  

In the trust, you can leave assets to the child that will be made available to him or her at the age stated in the document. However, a provision can be added to the minor’s trust stating that, if the beneficiary is still a minor when the grantor dies, the assets are left to the trustee who must care for them until the child reaches the age designated in the trust, transferring the assets from the trust to the beneficiary, including any income from the trust.

2053(c) trusts are irrevocable minor’s trusts for, the objective of which is to avoid paying gift taxes. The federal government assesses a gift tax, but provides an exemption that’s valued at $14,000 or less per year per recipient. A gift that’s not distributed until a person reaches a certain age wouldn’t qualify for the exemption.

However, the IRS allows the $14,000 exemption to apply to gifts made to a 2053(c) if the contract states that the minor is the only beneficiary of the trust and that any income the trust earns as well as the original assets are given to the child at age 21. 

If the child dies before turning 21, the assets in the trust can be paid to or held in trust for others, such as the child’s siblings. In addition, the child also has the right to give away the assets in the trust if he or she dies before turning 21 by specifying a beneficiary in their will.

Is a minor’s trust right for you?

Parents, grandparents, or other family members making gifts to younger children through a minor’s trust must closely adhere to the IRS requirements or risk forfeiting the gift tax annual exclusion. If donors have reservations about the financial and emotional maturity of their children or grandchildren when they reach the age of 21, they should explore other alternatives.

Also, it’s important to choose a trusted adult to act as trust administrator, one who will act in the best interests of the beneficiaries of the trust.

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