Giving a Gift to a Minor Through Your Estate Plan

Whether to a child, a grandchild, a special niece or nephew, many people wish to give gifts to minors through their estate plan. It can be accomplished through a will, a trust, a life insurance policy, or even by naming a beneficiary on a retirement account. Making the gift correctly can avoid a lot of hassle.

In this article, I am not addressing the tax implications through the estate tax, the gift tax or the general skipping transfer tax. I am only addressing the mechanics of how the transfer is made.

Many states, like Virginia, have the Uniform Transfer to Minors Act. If a minor is the beneficiary of a gift from a will, trust, insurance policy or other source, then the gift-giver has the power to appoint a custodian. The custodian then has the authority to hold the gift for the minor until the minor reaches 18, and use the money for the minor’s benefit.

If the gift-giver fails to name a custodian, then this can create problems. In Virginia, the person who wants to hold the property for the minor must then petition the court to be appointed the guardian of the estate of the minor. This is true, even if that person is the minor’s custodial parent. The guardian of the estate must post a bond with surety, and then comes under the supervision of the Commissioner of Accounts. Before using the money for the minor’s support, the guardian of the estate must consider all other sources of income or support for the minor. Generally, this means that the money cannot be used until the minor reaches the age of eighteen. As you can see, the need to go to court and the supervision afterwards creates a hassle and expense.

Other options in this situation can be for the Commissioner of Accounts to hold the money in an interest bearing account until the minor reaches the age of eighteen. Or, if insurance proceeds, the insurance company can hold the money until the minor reaches the age of 18.

Nonetheless, these options all leave something to be desired. It involves giving up control, and/or accepting court supervision.

The way to solve that problem is by leaving the gift through a well crafted trust. By creating a trust, the gift giver can define how the money is to be used, and when the money is to be turned over the to minor. For example, the trust can provide that the money can be used at the discretion of the trustee for the minor’s expenses. The money need not be turned over when the minor reaches age 18. Rather, if there is a concern that the minor would not be responsible enough, then the money can continue to be held in trust until the beneficiary reaches a suitable age, as defined by the gift-giver. Moreover, if the minor is disabled, as defined by Social Security law, then the trust can and should be drafted in such a way so as to avoid disqualifying the beneficiary from government benefits.

Gifts to minors through an estate plan are usually best made through a trust. For advice on how to craft such a trust to suit your specific needs and desires, call me at (703) 837-8832.