The Types of Trust Funds for a Minor

By Tom Streissguth

By setting up a trust, you can place assets under the control of a trustee, for the benefit of another person, whether an adult or a minor. A trust has several advantages for the beneficiary and the person who sets it up: The trust does not have to go through probate when the grantor dies, and -- depending on how it's set up -- it allows the grantor to avoid taxes on income generated by the trust assets. There are several different types of trusts that can benefit a child who's not yet ready to handle financial responsibilities.

Generation Skipping

Trusts give the grantor control over how assets are distributed to heirs. In a generation-skipping trust, for example, a grantor instructs the trustee to distribute income for the benefit of grandchildren. This structure would help a grantor keep assets intact through at least two generations, and prevent his own children from dissipating assets solely for their own benefit. The children of the grantor may still have access to the trust, but for the purpose of supporting their own children. The IRS levies a "generation-skipping transfer tax," however, on any inheritance set up in this way.

Personal Residence Trust

With a qualified personal residence trust, a grantor can gift his residence to his children, while remaining in the home for a period of time set down by the trust. The IRS rules take the interesting view that the home will depreciate in value over time, using interest rates, the grantor's life expectancy and other factors in the calculation. When the children take possession, this shrinks the amount of the grantor's estate subject to the "unified" gift and estate tax. In 2014, this tax reached up to 40 percent on amounts above a $5.34 million exclusion. However, if the grantor dies before the trust conveys the house to the children, the IRS wants the full market value of the house counted for estate tax purposes. If, on the other hand, the trust expires and the grantor remains among the living, he must either move out or pay rent to the children to remain in the house -- otherwise the full market value is counted for estate tax purposes.

Protect your loved ones. Start My Estate Plan

Trust-Bound Life Insurance

In trust language, an "irrevocable" trust is one that the grantor may not change or revoke. This kind of trust offers some estate tax advantages; an irrevocable trust that includes a life insurance policy, for example, removes the death benefit from the estate, since the IRS considers an irrevocable life insurance trust to be the legal owner of the policy. If a grantor's children are the beneficiaries, they receive the full, tax-free payout upon the grantor's demise. In the meantime, the grantor may not change beneficiaries or borrow against the policy.

Pot Trusts

If a family has several children, the parents can set up an equitable division of their assets by using a pot trust. A pot trust is designed to hold all the parents' assets in trust, after the death of a surviving spouse, and until the youngest child reaches a certain milestone. This could be the age of 18, or graduation from college. In the meantime, trust assets benefit children who have not reached the milestone -- thus guaranteeing their continuing financial support as a minor. A pot trust can also be designed to assist a special needs child who requires greater financial support for living expenses, medical treatment and physical therapy.

Protect your loved ones. Start My Estate Plan
Types of Living Trust
 

References

Related articles

California Irrevocable Trust Laws

An irrevocable trust is an estate-planning tool designed for the long-term management of assets, which are permanently transferred into the trust. There are several types of irrevocable trusts, but the common denominator is that the settlor – the person who creates the trust -- gives up control and ownership of his property; however, California law does provide for modification of an irrevocable trust under certain circumstances.

A Living Trust Explained

A living trust is a legal device that establishes how your property is to be transferred upon death, but goes into effect during your lifetime. The grantor, who puts his property into the trust, assigns a trustee to administer the trust on behalf of a beneficiary. There are several types of living trusts. In comparison, a testamentary trust is created by the terms of a will and does not go into effect until death. Living trusts avoid probate but testamentary trusts do not.

Living Trusts & Surviving Spouses

A trust is an estate planning device created when a grantor surrenders his property to a separate legal entity for the purpose of benefiting select individuals. A trustee named by the grantor holds the trust property in his name for the benefit of the beneficiaries and manages the property according to the trust's terms. A living trust is one established by a living grantor, often with the grantor serving as the first trustee. The rights of the spouse to the trust property when the grantor dies depends on state law and the terms of the trust.

LegalZoom. Legal help is here. Start Here. Wills. Trusts. Attorney help. Wills & Trusts

Related articles

Taxes & the Advantages of Living Trusts

A living trust is a document that a person creates while he is still alive, which enables him to financially provide ...

Types of Beneficiaries in Irrevocable Trusts

An irrevocable trust is an unalterable agreement made by a person, the trustor, regarding the assets he places in the ...

How to Set Up a Tax ID Number for a Trust Account

A trust is a legal arrangement that allows property to be held for the benefit of a named beneficiary. There are a ...

Can I Pay Medical Expenses From an Irrevocable Trust?

A trust is a method of placing assets under the control of a trustee, for the purpose of passing these assets to ...

Browse by category
Ready to Begin? GET STARTED