PME Estate Planning, Trust, and Probate Blog

Welcome to the PME LAW Blogs. In this blog, we will focus on PME Estate Planning, Trust, and Probate Blog developments, particularly within the state of California. Nothing in this blog should be construed as legal advice. PMELAW.com is a public website, so communications are not privileged. Copyright Perkins, Mann & Everett (PME LAW) © 2015. All rights reserved.

Planning for Minor Beneficiaries

Written by Curtis D. Rindlisbacker, Esq.

Careful attention is required when leaving property to a young beneficiary to avoid unintended consequences and costs.

The identity and capabilities of intended beneficiaries is always important. This is particularly true when the intended beneficiary is under the age of eighteen. California law defines a minor as any person under that age. Minors have no legal authority to manage their own financial affairs. For this reason any contemplated gift to a minor, whether during the donor’s lifetime or following the donor’s death, requires careful planning. Several alternatives are available. This article will outline the legal tools available for managing the property of a minor, including benefits of life insurance policies.

Guardianship of Estate

A gift made directly to the minor will require the court appointment of a guardian of the estate. Court supervision of financial transactions, other than the most routine, will be required. Generally a guardianship will require the hiring of an attorney and regular court filings to report the management of the minor’s property. When the minor reaches the age of eighteen the guardianship will terminate and the funds must be turned over to the minor beneficiary.

Custodian under California Uniform Transfers to Minors Act

A donor may give the property to an adult to hold for the benefit of the minor beneficiary under the California Uniform Transfers to Minors Act. The adult person is called the custodian. The custodian is able to manage the property without court supervision. The property must be turned over to the beneficiary at age eighteen unless the donor specifies a later age when making the gift. Lifetime gifts may be delayed to age twenty-one. Gifts made at death may be delayed to age twenty-five. A custodian cannot manage money for more than one minor beneficiary in any one account. This is an inexpensive method for controlling a minor’s money and simply requires the correct legal designation of the custodian for the benefit of the minor.

A Minor’s Trust

A minor’s trust is a creature of the Internal Revenue Code. A donor can create a trust that gives discretion to the trustee to provide benefits to a beneficiary under the age of twenty-one. This type of trust requires that the property be turned over to the beneficiary (or at a minimum give the beneficiary at right to withdraw the money) at the age of twenty-one. There can be no substantial restrictions on the trustee’s discretion to use the trust money for the benefit of the beneficiary before age twenty-one. Gifts to this type of trust qualify as present interest gifts without giving the beneficiary a right to withdraw the donated money before age twenty-one.

Lifetime Crummy Trust

A living donor can create an irrevocable trust that can hold and manage the property for the benefit of a beneficiary. Unlike each technique described above the property can be held and managed for the beneficiary beyond the age eighteen, twenty-one, or twenty-five. In addition, a donor can restrict how and when the property is used for or distributed to the beneficiary. For example, a donor may wish to create conditions that must be satisfied before the money can be used. The kind of conditions that can be used is limited only by the imagination of the donor. The only limitation is that a condition cannot be imposed that would violate public policy. Any gift left in trust will qualify as a present interest gift so long as the trust requires the trustee to give the beneficiary the right to withdraw any donated money for a period of at least thirty days and the beneficiary is notified of that right. Such a withdrawal right is commonly referred to as a Crummy withdrawal right.

Staggered Support Trust

A donor can create a trust that will hold and manage property for the benefit of a beneficiary and provide for distributions to the beneficiary in stages. Commonly, a donor might specify a percentage of the trust to be distributed at a minimum age with additional distributions staggered over a period of years. This type of structure allows a beneficiary to receive a portion of the gift without exposing the entire trust fund to the possible mismanagement by the beneficiary.

Asset Protection Trust

A donor can structure a gift in a trust that is designed to protect the trust property from any lawsuit judgments entered against a beneficiary. In addition, the property can be protected from any divorce actions filed by a spouse of the beneficiary. To be most effective, these trusts must designate a trustee who is unrelated to the beneficiary. This unrelated trustee is given discretion when deciding how and when the trust property is used for or distributed to the beneficiary. The beneficiary, or a trust protector, can be given the power to remove and replace this unrelated trustee. The trust will include spendthrift provisions that protect the trust property from being attached to satisfy lawsuit judgments. Child support and spousal support judgments cannot be avoided. The trust property is not owned by the beneficiary and so is not subject to division in a divorce proceeding.

Special Needs Trust

A donor who wishes to leave property to a beneficiary who is disabled should consider using a special needs trust. These are discretionary trusts that direct a trustee to use the trust property to supplement any benefits the beneficiary is eligible to receive from government programs such as social security disability income and medical benefits under state Medicaid programs. These trusts are specially designed so the trust property will not disqualify the beneficiary for these government benefits.