Establishing a Trust to Manage an Inheritance for a Minor

There are special considerations to be made when heirs of significant assets are minors. We discuss some options for managing this type of inheritance.

When a minor is to inherit over $10,000.00 from an estate, a guardian must be appointed for the minor’s property. This is due to the fact that although a child’s parents are his natural guardians, they do not have the right to control the child’s property exceeding this $10,000.00 limit.  A more effective mechanism for leaving money or assets to a minor is to leave the inheritance in trust for that minor and appoint a trustee to manage the trust.

Types of Trusts to Consider

There are generally two types of trusts: inter vivos, which is a trust created by the grantor during life, and testamentary trusts, which is a trust created under the terms of a will.  The Surrogate’s Court has jurisdiction over both types of trusts.  However, inter vivos trusts go into existence at the time the trust documents are signed. Therefore, it is not necessary to petition the Surrogate’s Court to become appointed as trustee of an inter vivos trust.  The Surrogate’s Court often only gets involved with these types of trusts where the parties to the trust disagree over the terms of the trust, or how the trust is being administered, for example.

With testamentary trusts, the will must be offered for probate and established to be the valid last will and testament of the decedent before the trust will go into effect and letters of trusteeship will be issued to the nominated trustee. Therefore, one thing to take into consideration when drafting a trust is whether there are other resources available to adequately care for the minor child during the probate proceeding, which could take several months. If the proceeding becomes contested, it could take much longer.

Specifying Terms of the Trust

The terms of the trust can be as specific or as broad as you would like them to be. For example, you can set up a trust so the child receives his inheritance outright upon reaching the age of 18, or you can increase that age specification.  The terms of the trust can also dictate what the funds should be used for (e.g. schooling, healthcare) and can contain various restrictions. Sometimes the person creating the trust wants to encourage or discourage various activities and may make a distribution of the funds contingent on whether the beneficiary partakes in those activities.

Advantages of a Trust

Setting up a trust allows the creator to name a trustee to manage the trust, it allows the creator to control how the trust funds are used, and it allows the creator to dictate when the funds are to be distributed. These are all significant advantages of estate planning. Without this type of planning, the assets could flow directly to the minor, which would require that a guardian be appointed (as described at the outset of this article).

In order to have a guardian appointed, a petition must be filed with the Court to initiate a guardianship proceeding.  This is a costly and time-consuming effort, which can be avoided through estate planning.  There are other disadvantages as well. After appointment, the guardian must get court approval prior to accessing funds, which requires even more time and expense and the Court is strict in permitting access.  Further, the child is usually granted full access to the guardianship funds upon turning 18, which is not always in the best interest of the child.

To determine what type of estate planning is appropriate for you and your loved ones, you should consult an experienced trusts and estates attorney.