The plus of setting up trusts for minors is that you can do virtually anything you want. The minus is that with so many options, it can be hard to choose what to do. Should you have separate shares for each minor from the beginning, or a “pool” or “pot trust” until a certain point in time? If the latter, when should that end? What should each minor get out of his or her share, and should that change over time?
While we see a great variety in what clients want to do for minors (usually their children), one pattern we often see looks something like this:
- The trustee holds the assets in a single pool until the youngest child in the defined group reaches age 21 (or 22 or 23). This cutoff age is tied to the end, or near the end, of college tuition bills, which are often the last large expenses for which parents may spend on their children. Until that time, the trustee spends the income and principal on all the children, just as the parents usually would. Parents can specify in the terms of the trust whether these distributions should be more or less equal, or not.
- Once the youngest child reaches the cutoff age, the trust is divided into shares for each child (with the collective children of any deceased child also getting what would have been that child’s shares).
- The child gets the income from his or her share (for income tax simplicity).
- The child also gets principal from his or her share as he or she requests from the trustee, with limits until certain ages. Example: the child can request (require the trustee to give them) up to half of the principal of his or her share (as of time of division of shares) at age 25, and the rest at age 35. The ages and fractions can be whatever you want, though we rarely see assets being held in trust for much beyond age 40 (if there is an intention to hold assets in trust longer than age 40, there are usually deeper problems that lead the client to require that the assets should be held in trust for life). And the child may actually have reasons to keep the amount in trust beyond the age when they have access — for example, in case of a later divorce, to document clearly that the asset remains a separate, inherited asset.
- In addition, for added flexibility, the trustee continues to have the discretion to spend the principal of that child’s share for the child’s benefit.
- The child gets the right to direct what happens to any amounts remaining in the trust on his or her death — known as a power of appointment. If the child doesn’t appoint the share (or all of it), it typically defaults to his or her children or descendants, or otherwise to the descendants of the child’s parent.
- After a certain age, the child may have a say in hiring or firing the trustee.
Clients seem to like the above format; the most frequent variations are in the different ages or fractions for the children to be able to access the principal of their shares.
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