Choosing the best way to efficiently and effectively set aside assets for a minor is a challenging and essential part of estate planning. Asking yourself the “why,” “who,” “what,” “when,” and “how” questions will lead you to consider which conditions to incorporate with the gift, if any. Some gifting strategies are better than others to meet an objective.
An outright property gift to a minor, if valued at greater than $5,000, cannot legally be completed unless the court appoints a guardian for the minor’s estate, a trustee of a trust for the minor, or a custodian of the minor’s assets (lesser gifts may pass to a parent to hold for the child, under certain circumstances). The appointed legal representative is bound to hold the gift until the minor is age 18 (“majority” in California). Such court intervention is expensive and time-consuming. Knowing this, who would want to expose a child’s gift to such a hassle?
A Custodianship under the Uniform Gifts to Minors Act (CUTMA) is a simple, inexpensive solution. A CUTMA transfer takes place when title to an asset is taken in the name of a custodian, for a named beneficiary, followed by the precise wording “under the California Uniform Gift to Minors Act.” CUTMA title works for nearly all types of assets. A gift structured as a CUTMA can be created during life or established after death through a will or revocable trust. Using CUTMA transfer language, no further legal documentation is required. The named custodian has authority to manage the asset, make distributions on behalf of the minor beneficiary and distribute the asset at the beneficiary’s majority. If 18 is deemed too young for distribution, the transfer may be worded to delay distribution for any later time, up to the maximum age of
25. The custodian has a fiduciary duty to preserve the asset and use it exclusively for the beneficiary’s benefit.
Another simple gift form is a “payable on death” (POD) account (sometimes called Trust on Death or TOD). These accounts pass at death to the named beneficiary. The benefactor owns the account during his or her lifetime, and the named beneficiary has no right to use, manage or control the asset until the original owner’s death. The account ultimately passes without probate, wholly outside of a will or revocable trust. This simplicity is useful when the value is modest, and conditions on use or distribution unnecessary. However, if the beneficiary is a minor at the original owner’s death, the guardianship proceedings cited here would be required before account proceeds could be distributed.
If large gifts or highly valued assets are at stake, using a trust is the better alternative. A trust can incorporate personalized terms, set specific ages for tiered distributions or name events that may trigger distributions. Investment management directions and restrictions may also be incorporated. Principal and income distribution provisions can differ and complex tax issues (gift, estate and income tax issues) can all be addressed.
A trust will be more complicated than a CUTMA or POD arrangement; however a trust provides greater protection of the benefactor’s intent and may afford the beneficiary his/her own asset protection. A trust term can also be stretched out beyond age 25 or staggered if withholding assets until the beneficiary attains a certain maturity level is important. Such trusts can be created as lifetime gifting vehicles or can be included in a will or revocable trust, effective at the benefactor’s death.
Parents planning for modest estates frequently state in their wills that the estate remainder passes to their children but fail to consider the complications of an outright distribution to minors. The best alternative is to leave the assets in trust for the benefit of the children, to be managed by a trustee of the parents’ choosing. Such a trust may include special provisions allowing the trustee to make a child’s support payments to the named “Guardian of the Person,” nominated to care for the child. Distributions can be earmarked for education, specialized needs, extraordinary care and so forth. Provisions can also be added to specifically allow the trustee to pay a portion of a child’s trust funds to offset expenses related to integrating an additional child into the guardian’s family—possibly helping to defer costs of expanding the family home, purchasing a larger car for the family or financing vacations for a larger family.
Children’s trusts can be “separate share” or “family pot trusts.” Separate share trusts are created by dividing the whole after death into separate but equal portions for each child. By contrast, using a family pot trust, a single trust will remain intact until the youngest child reaches a given age, when the trust will be divided among the children and either distributed in equal portions outright, or will continue to be held in separate portion trusts for a given time. Prior to division and separate distribution all the children’s’ expenses are paid from the family pot trust assets—just as they would be paid in a normal family, without constant equalizing.
Be aware that a $500,000 pot trust could be nearly depleted by one child with special needs to the apparent detriment of the non-needy child by emergency medical expenses or special education requirements. Such situations can cause intra-family disputes and sometimes result in one beneficiary suing the trustee for failing to treat both beneficiaries “fairly.” Since the trustee has sole discretion to make distributions, the trustee can be under severe scrutiny, even when underlying facts provide a reasonable defense. Deciding whether to choose a separate share trust or a family pot trust should depend on the value of the total estate, the size of the family, health and ages of the children and other available resources.
