Last month we looked at guardianship, the first of two issues that affect planning for minor children. This month we will look at some ideas for leaving money to minor children.

We start with the idea that minors cannot really own investments outright. As such, dealing with gifts of sizeable amounts of money, investments, and other property must be handled differently than giving small amounts of money for birthdays or holidays.

Most states have laws allowing you to set up custodial accounts for minor children. These accounts are commonly known as UGMA (Uniform Gift to Minors) or UTMA (Uniform Transfers to Minors) accounts. The primary difference between the two is that UGMA must terminate at 18 and UTMA accounts can last until the minor reaches 21 years old.

These accounts are often used by parents and grandparents who want to gift modest sums to their children or grandchildren. They are usually not used for more significant amounts since the accounts terminate at a relatively young age. It is also possible to include the accounts in the estate of the person who set them up, increasing the potential for estate taxes.

For these reasons, most professionals recommend the use of trusts to hold money for young children.

There are multiple types of trusts that can be used, including living trusts, gifting trusts, irrevocable trusts, life insurance trusts and even under some circumstances, charitable trusts.

All the trusts share the idea that the person who creates the trust also creates the rules for management and distribution of the funds being left for the minor child or children. For example, clients who want to leave money for college or education, can limit the use of funds held in trust for those purposes. Similarly, clients who want to make sure that their children or grandchildren are not able to use the money for frivolous purchases, can use trust language to guard against extraneous spending.

A major consideration when setting up a trust is appointing a trustee, who is charged with following the rules and looking out for the best interests of the children or grandchildren.

Trusts also allow you to extend the date of distribution well beyond the ages of 18 or 21 which are common in the UGMA or UTMA accounts.

If you are a parent or grandparent (or uncle or aunt) and want to leave money to minors and even young adults in a protected manner, consider the use of a trust.

We can help you think through which trusts might provide the right structure for you and your specific circumstances.

