“Trusts for minors”, or minor’s trusts, are very specific types of trusts that are used to hold and distribute property or assets to minors. They typically provide instructions that the money or property assets will be held in trust until the minor reaches the age of majority. This is usually 21 years old in most cases.
Trusts themselves are financial tools that allow a person to manage and distribute their property more efficiently. There are many different types of trusts, and trust laws can vary by state.
The person creating the trust may also place various conditions on the trust, which must be met before the child or minor can claim the property or assets. For example, the trust may have instructions that the property may only be distributed “when the minor is at least 21 years old and has graduated from college.”
Knowing the various terms associated with trusts is helpful in understanding how trusts for minors work. The person creating the trust is typically called the “settlor” or “grantor.” The settlor will transfer the assets to a third party, who is known as a “trustee.” This trustee will hold the assets in trust according to the settlor’s specific instructions.
At the specified time, the trustee will then transfer the assets to the recipient, who is usually called the “beneficiary.” In trusts for minors, the beneficiary is the named child or minor.
The main benefit of minor’s trusts are the various tax exemptions that may be available. Generally, a parent can make a gift to a minor up to a certain amount, without resulting in any tax consequences. This is known in most states as the “gift tax exemption”. However, in order to qualify for the exemption, certain requirements must be met. For instance, the child must have “immediate access” to the gift and “control” over it.
Normal trusts usually wouldn’t qualify under state gift tax exemption laws. This is because the recipient won’t have immediate access to it (they usually only claim the trust assets several years later).
Also, another benefit (and often the very reason why such trusts are set up) is that it can help transfer money or property to a person in a way that is more financially responsible. For instance, if the beneficiary received the property at a very young age, then they might not have the capabilities or understanding to manage such property or funds.
If a trust is put under control of a responsible guardian, then the minor won’t be able to spend all of it and the trust could potentially grow in value if it is invested (and invested wisely).
In order to be valid, a trust for a minor needs to meet all the basic requirements for a trust, and several others. These may include requirements such as:
- The minor is the only stated beneficiary for the trust;
- All income that the trust generates must be transferred to the child when they reach a certain age (usually age 21). This includes the original assets; and
- The minor is given the right to distribute the trust assets in the event that they become deceased before the age of 21. That is, the minor can state how the trust is to be distributed in their will or other legal document. In some states, the age of majority may be 18 years old and not 21.
- However, the time that the minor is to receive the trust assets depends on the settlor’s intent and personal preferences. In some instances, the settlor may state an even later time, such as age 25.
In some cases, it may happen that the trust assets are not actually claimed at the specified time. What usually happens in such circumstances is that the beneficiary will be given notice that the trust assets are now available. After they receive notice, they usually have around 30 to 60 days to claim the assets or property (the “notice window”).
If the 30-60 days expires without the beneficiary claiming their property or assets, then the funds will remain in the trust account. However, they will be outside of the beneficiary’s control. Depending on the trust instructions, the beneficiary may not regain access for a specified period of time, which can be anywhere from 5-10 years. Jurisdictional rules may also affect the access time.
Creating a trust for a minor can often be a complex undertaking. There may be several considerations that you need to make, since the assets might not be distributed for many years. Also, the rules and laws governing trusts may vary by region.
However, a trust lawyer in your area can help you draft, review, and implement the trust so that it is valid. Also, a lawyer near you can represent you in court if a dispute arises over the minor’s trust.