The Types of Trust Funds for a Minor

By Christine Funk, J.D.

The Types of Trust Funds for a Minor

By Christine Funk, J.D.

Trusts have several advantages over wills, particularly when they are set up for a minor child. Assets in a trust do not have to go through probate, the legal process of proving and executing a will, and are therefore not public record. Additionally, these assets can be distributed more quickly and efficiently than working through probate court. Depending on the situation, there can be tax advantages as well.

Hands using a tablet with the words "Trust Fund"

Because minors are not considered responsible enough to inherit, setting up a trust allows its creator to designate what the funds should be used for and when the identified minor beneficiary can inherit them. There are several types you can create that work this way.

Pot Trusts

Pots trusts are useful for families with more than one minor child. The assets the parents designate fund the trust upon the passing of the last surviving spouse. These funds are used to provide generally for the minor children.

When the parents create the trust, they must determine a specific milestone at which the provisions end, such as when the children turn 18, when they graduate from high school, when they finish college, or another milestone. The funds remain in the trust until the last child reaches the milestone. Then, the remaining funds are designated for another use, such as distribution among the children.

Education Trusts

The funds put into an education trust can be designated solely for use for the children's education. The creator of the trust, called the grantor, can impose conditions, such as only using the funds for attendance at a particular school, or they may broadly designate them for any educational purpose.

An education trust may be set up either as revocable or irrevocable. Irrevocable means just that—the grantor cannot make any changes after it is created. In an irrevocable trust, the funds are transferred for the use designated, so there may be some tax benefits. If a minor child has special needs and would benefit from a particular educational experience, an irrevocable educational trust can ensure funds are available for that purpose.

Trust-Bound Life Insurance

Another type of irrevocable trust can include a life insurance policy. The benefit of including a life insurance policy is that it removes the death benefit from the general estate for tax purposes. This ensures a tax-free payout to the minor children upon the grantor's passing.

The drawback of including a life insurance policy in an irrevocable trust, though, is that the grantor may not change their mind, revise the trust in any way, or choose to disinherit one or more of the named children.

Grandchildren Trusts

You can also set up a generation-skipping trust that allows the grantor's assets to pass to the grandchildren rather than their own children. This prevents their adult children from spending their inheritance on themselves.

Still, the parents of the grandchildren may have access to the trust in order to support the grandchildren, depending on the written terms and conditions. There are, however, some tax consequences to creating this particular kind of trust.

People have a number of different options when setting up a living trust for minor children. The types described here are some of the most common and helpful for providing for generations to come.

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