Part 3: Trusts and Property Guardianships
As mentioned in the previous post, there are three main ways that property is managed for children in estate planning – custodianship under the UTMA, trusts for children, and property guardianships. This post will discuss trusts for children and property guardianships.
Trusts for Children
A trust for a child can be created either in a parent’s will or living trust. In a child’s trust, the child is the “beneficiary” and the child’s property manager is called the “trustee.” The trust document will set out the trustee’s responsibilities, the beneficiary’s rights, and the age at which the beneficiary may take ownership of the assets outright. In “family pot” trusts, more than one beneficiary may share rights to the assets of a trust (for example, all the siblings in a family).
Similar to custodianship under the UTMA, the trustee is entitled to reasonable compensation for his or her services. The trustee must manage the trust property in accordance with the instructions in the trust document. Usually, the trustee will be authorized to use the assets for educational needs, medical expenses, and other reasonable living expenses.
Since parents can specify the age at which the child will own the assets outright, trusts are most appropriate when the value of the assets is substantial and will likely not be used up by the time the child reaches age 18 to 25. The advantage of setting up a custodianship under the UTMA is the relative ease and low cost compared to the effort and cost it takes to establish a trust. However, a trust gives a parent the most amount of control in determining not only when the gift will be owned by the child outright, but how those assets will be managed in the interim.
The third general type of property manager for children is a property guardian. This is someone who can be appointed in your will and has authority to manage any of a child’s property that hasn’t already been accounted for by another type of property manager. Property guardians are subject to court review and the guardianship must end when the minor turns 18.
Naming a property guardian is appropriate in situations where a minor receives large gifts or inheritances from another person that doesn’t already name a property manager, where a minor may earn substantial amounts of money after the parent dies, or to cover any gifts a parent may leave the child that isn’t already included in a UTMA or child’s trust.