The Settlement Alliance

What Happens to Trusts for Minors?

What Happens to Trusts for Minors?

Dec 14, 2016

When money is reserved for a minor—whether as the result of a settlement or an inheritance—the primary goal is to make sure that they money is there when it’s needed. A trust is one of the best ways to protect funds for a minor. Here are the basics that you need to know about trusts for minors:

How does a minor’s trust work?

It is best to have the trust documents drawn up by an attorney who specializes in trusts in your area of jurisdiction. There are state-specific (and even county-specific) requirements for minors’ trusts that must be adhered to in order to gain court approval.

Once the trust is funded, it is managed by a trustee. The trustee can be a loved one—a parent, grandparent, or guardian, for example—or by a professional trustee. In some instances, the court may require that the trust be managed by a trustee. Either way, any distributions from the trust must be made for the benefit of the minor.

The schedule of distributions depends entirely on the minor’s needs, and must be written into the trust documents. A minor’s trust has some flexibility in terms of distributions, with the option to receive funds prior to the age of majority (age 18 in many states; older in others) or later, if the funds aren’t needed right away. Many choose to have the final payment made at the age of majority, but if there are concerns about the minor’s ability to manage those funds, some states allow the final distribution to be delayed beyond the age of majority.

When deciding on an investment strategy, you’ll want to consider current and future medical needs, any anticipated loss of earnings, future plans (such as college or a home purchase), and the minor’s expected ability to handle funds at the age of majority.

Once the final payment is made and any other trust administration tasks are handled (i.e. final accounting, tax returns, etc.), the trust can be closed.

Are there costs associated with a minor’s trust?

There are fees associated with drafting the trust and paying a trustee, but the costs pay off in peace of mind—knowing that the trust has all of the appropriate legal protections necessary to protect the minor’s funds. In terms of taxes, if the money that will fund the trust came from an injury settlement, the funds are not taxable. However, any interest that accrues on the trust investment is considered taxable income, although the trust itself may be able to deduct distributions related to medical costs and/or trustee fees.

Structured settlements and trusts for minors

If the minor’s money comes from a settlement, you may want to consider incorporating a structured settlement. Structured settlements for minors are typically arranged to begin when the minor reaches the age of majority. However, if the structured settlement proceeds are paid directly into a trust, payments can begin sooner. Depending on the minor’s needs, payments can be scheduled for monthly, quarterly, semi-annual, or annual installments. In addition to the flexibility of design, any investment growth on the structured settlement is 100% income tax free.

Alternatively, you could choose to use part of the settlement proceeds to fund a trust and the other portion to fund a structured settlement. The advantage to this approach is that the trust can provide for the minor’s needs prior to the age of majority, while the structured settlement can be arranging to begin making payments after the minor reaches the age of majority.

Contact our minor’s trust experts

Our settlement planning team has the resources needed to analyze the minor’s needs and select the best investment option(s) and create a plan to meet the court’s approval. We offer access to a nationwide network of estate attorneys and trustees who specialize in handling trusts for minors. Contact us at info@settlement-alliance.com or 800-464-2500 to learn more.

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • Liberty Life Assurance Company of Boston
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential