Minor trusts can be helpful in terms of distributing designated assets to an individual on your terms. If you are the parent, guardian or relative of a child and want to ensure their future is financially secure, you might consider looking into minor trusts. They can provide financial stability as a minor child reaches adulthood and in the years that follow. To learn more about minor trusts and how to approach creating one, keep reading.
What is a Minor Trust?
A minor trust, as the name suggests, is a trust in which the beneficiary is under the age of 18 at the time it is established. These are used to direct how assets are used, for minors who are not yet able to responsibly manage their finances. These funds typically have specific requirements that must be met before the beneficiary has access to the funds, such as an age limit or a milestone in education. The requirements are meant to increase the probability that the beneficiary is ready to handle the assets when they receive them. A child receiving $1,000,000 from a parent’s life insurance policy on their 18th birthday, may not make the best financial decisions once having full access to the funds.
Prior to the beneficiary meeting these requirements, the grantor will name a designated trustee or trustees. This trustee should be a qualified adult who can be trusted to manage the minor’s trust until they are able to receive it. There are also options to name a bank or financial institution to act as the trustee, in the event you do not have a person you trust, or you want to ensure the trustee is available for decades going forward. When the time comes for the beneficiary to claim the trust, they will be notified that it is now available to them and what their options may be in terms of taking the funds outright, or investing them.
What are the Benefits and Drawbacks of a Minor Trust?
The biggest benefit of setting up a trust for a minor is that it protects their financial future. You are able to set them up for success by providing means for a college fund, housing, or other expenses that they will need paid upon reaching adulthood. You also have a lot of control over how your assets are used by placing them in a trust. You can make the requirements of the minor trust as specific or general as you would like. If you want it to be solely used for educational purposes, you can make that a condition. This provides more control to you as the grantor than simply naming them as a beneficiary in your will could.
With all of this in mind, there are a few drawbacks to consider. Trust funds often incur management fees annually, and can also require legal fees when arranging the trust. There are also tax consequences to consider and the potential that there is a dispute over the trust investments or handling of assets. Often the benefits of a trust outweigh the costs, but it is normally on a case-by-case basis and depends primarily on your family and financial situation.
How to Form a Minor Trust
To form a trust, you should first decide which type you want. The two main options are irrevocable or revocable, which determine whether or not you can make changes to the trust once it is implemented. There is also an option for special needs trusts, which are made to maintain the beneficiary’s access to Medicare, supplementary social security income, and other government benefits they may be entitled to. Another option is a testamentary trust, which will go into effect after your passing and is made as part of your Will.
As the grantor, you have all aspects of the trust to consider. How old should the beneficiary be when they have access to the funds? Are there any other conditions that must be met? How much is in the trust, and how often does the beneficiary receive the money? As stated previously, you might also specify how you want the money to be used, whether it is for education, medical care, or other needs.
To arrange a trust, according to the State of New Jersey it must be in writing. The document will need to include specific clauses and then need to be signed and notarized. One common mistake is failing to “fund” the trust, meaning assets need to be transferred into the trust. Otherwise, it is a legal entity, but without any funds to be distributed. It is worthwhile to discuss the value of a trust for minors with your financial advisor or your accountant.
