If any of your living trust’s beneficiaries (including alternative and residuary beneficiaries) receive trust property before they are ready to handle it without the assistance of an adult, you should arrange for someone else to manage it for them for a period. There are numerous approaches to take:
Allow an adult to utilize the property for the youngster. Many individuals do not leave property to a kid. Instead, they leave it to the kid’s parent or the person they anticipate to be in charge of the youngster if neither parent is present. There is no formal legal agreement in place, but they trust the adult to utilize the property for the benefit of the kid.
Choose a custodian under the Uniform Transfers to Minors Act (UTMA). Almost every state allows you to appoint a custodian to administer property left to a kid until the youngster reaches the age of 18 or 21, depending on state law (up to 25 in some states). A custodianship is suitable if you do not need management to endure beyond that age.
Make a child’s trust. In your living trust, you may create a subtrust for your kid. If you do, your successor trustee will manage the property you left to the kid and distribute it for educational, health, and other purposes. The subtrust terminates at the age you choose (up to 35), and any residual property is given to the kid outright.
Should You Organize Management?
It is entirely up to you whether or not to establish provisions in the trust instrument for someone to administer trust property if it is inherited by minor beneficiaries.
The implications of not managing trust property inherited by a young beneficiary vary depending on whether the beneficiary is over or under the age of 18 at the time of your death.
Children Under the Age of 18
If your minor beneficiaries (children under the age of 18) will not inherit anything of significant worth – if you are leaving them goods of emotional rather than monetary value – you do not need to choose an adult to administer the property.
However, if a beneficiary acquires important trust property while still a juvenile and you have not designated an adult to manage the property, a court-appointed guardian may be appointed to administer the property.
Contrary to popular belief, a child’s parent does not immediately have legal power over any property that the kid inherits. Even if one or both of the beneficiary’s parents are still living, they may be required to petition the court for that power and will be subject to the court’s supervision. If neither parent is living, the court may have difficulty appointing a property guardian. In such circumstances, naming someone in your living trust may be even more vital.
In most jurisdictions, the successor trustee has the authority to designate a custodian for property inherited by a minor. If the value of the property reaches a specific threshold – $10,000 in most jurisdictions – the appointment must be approved by a court. In most jurisdictions, custodianship must cease at the age of 18, which is sooner than many parents would want. As a result, naming a custodian oneself is still preferable.
Young Adults aged 18 to 35
If someone above the age of 18 inherits trust property, there is no legal need to have someone administer the property on the beneficiary’s behalf. And if no agreements are made, the recipient will get the property with no strings attached. However, you may arrange for property management to continue until a beneficiary reaches the age of 35.
There is no legal need that administration of a trust beneficiary’s property terminate at the age of 35, but we believe this is a suitable age. If you do not want to grant a beneficiary complete control over trust property by the time he or she reaches the age of 35, you should consult with a lawyer and design a plan to the beneficiary’s requirements.
Which is preferable: subtrust or custody?
The most notable distinction is that a child’s subtrust may remain longer than a custodianship, which in most jurisdictions must cease at the age of 18 to 21. (up to 25 in a few). As a result, when a kid may inherit a considerable amount of property, a child’s subtrust is a viable option.
Because UTMA custodianships are significantly simpler to operate, they are frequently preferred if the beneficiary will receive no more than $50,000 in trust property ($100,000 or more if the kid is relatively young). That sum is expected to be depleted for living and education costs by the time the beneficiary reaches the age of 21, thus there is no need to set up a subtrust that can last beyond that age.
A custodianship offers other benefits:
A custodianship makes it simpler to manage a beneficiary’s property than a trust. The powers of a custodian are enshrined in state law, and most organizations, such as banks and insurance firms, are conversant with the restrictions. The terms of trusts, on the other hand, vary. Before allowing a trustee to act on behalf of a beneficiary, a bank may need to examine and evaluate a copy of the Declaration of Trust.
You may designate anybody as a custodian, and you can choose various custodians for different beneficiaries. For example, if you wish to set up custodial arrangements for grandkids, you might identify each child’s parent as custodian. A child’s subtrust is not as adaptable: The successor trustee will be the trustee of any children’s subtrusts established for your children.
If the property in a subtrust generates revenue and that money is not given to the beneficiary promptly, the trust must pay tax on it. The federal tax rate on such withheld money may be greater than the rate on which the young recipient would be taxed. The trustee may need to employ professionals to assist with trust accounting and tax returns.