Trusts are incredibly flexible and useful estate planning tools. There are many kinds of trusts which serve a variety of different purposes, but perhaps none so important as that of the “minor trust”.
The aptly named “minor trust” is a trust created for the benefit of a minor. In New York, minors cannot inherit property directly. Even if they could, it’s of questionable wisdom to endow a child with the ability to access substantial assets. Any of us who’ve every been young knows that financial maturity lagged quite a ways behind physical maturity. Young people, for the most part, can’t be trusted to make smart spending decisions. So, what is a parent to do? How do you protect your children from themselves and others in the event of your premature passing?
A couple of cheap and easy solutions include the UTMA (Uniform Transfer to Minors Act) and UGMA (Uniform Gift to Minors Act) accounts. These are types of financial accounts which can be opened at your bank or other financial institution. They allow you to act as custodian of a minor’s funds until they become adults. These types of accounts can be great for relatively small sums, however a major downside of these accounts is the lack of control which you, as a parent, can place on the accessibility of that money.
As a result, for any substantial sum of inheritance, the creation of a minor trust is ideal. Essentially, your will or trust can, itself, create another trust for the benefit of your children. This gives you control and flexibility over the way your children can access the money. When drafting a will or trust, these are the major considerations for parents: ages and life events that can trigger the accessibility of specific funds.
Principal (the pool of money in an account) and income (interest generated on that pool of money) can be paid out as early as eighteen, but that would kind of defeat the purpose. Instead, it’s far better to spend some time considering the folly of youth in all its whimsy. I’m half joking, but I think we all can appreciate how financial maturity does not come without life experience. It’s also very difficult to come up with the way you’d want money paid out to your children in a vacuum. So, I typically offer my clients a generic template from which to adapt their decisions - something like: income paid out no less than quarterly beginning at age 22, principal distributions of 25% at age 25, 25% at age 30, and the remainder paid out at age 35. This framework often helps parents in making these decisions. In the end, there is no perfect allocation - everything is up to you.
There are a number of life events which frequently serve to trigger either accessibility or inaccessibility of funds from a minor trust. Things like a wedding, purchase of a home, starting a business, and educational expenses are just some of the events which parents may want to consider for amounts of principal to be paid to your child. Sadly, other events like drug abuse or alcoholism, consumer debt obligations, and general recklessness in spending may trigger the inaccessibility of principal. Additionally, it’s always a good idea to communicate directly with the prospective future trustee (the person you name in the document to manage the trust upon your passing), so they have a more thorough understanding of your wishes. A document can only say so much, but a conversation can communicate the nuanced thoughts and feelings inherent in these complex decisions.
Is a minor trust a good solution for your family? Let’s discuss.