Most parents of minor children are extremely concerned about what will happen to their children if disaster strikes and the parents die unexpectedly. Providing for your minor children if you die involves two distinct concerns: (1) who will raise the children if you can't (that is, who will be each child's legal guardian), and (2) how can you best provide financial support for your children (e.g., what money or property will be available, who will handle and supervise it for the child's benefit, and what legal method is best for managing it).

Custody of Your Minor Child. A child's personal guardian must be named in a Will. You cannot use other Estate Planning devices, such as a Living Trust, for this purpose; which is one reason why a Will is essential even if you rely primarily on a probate-avoiding trust to transfer the bulk of your property to your heirs. Nevertheless, it is important to understand that a person named as a minor's personal guardian in a will does not actually become the legal guardian until approved by a court. The judge has the authority to name someone other than the parent's choice if the court is convinced it is in the best interest of the child. However, if no one contests your choice for your child's personal guardian, a court will almost certainly confirm the person named in your Will.

Naming an Adult to Manage your Child's Property. Minor children cannot own property outright, free of adult control, beyond a minimal amount. This means an adult must be legally responsible for supervising and administering all property owned by a child. Therefore, a vital part of your Life Plan is arranging for responsible supervision of property belonging to your minor children. This includes both property you leave for your child's benefit and any other substantial amounts of property they may acquire. One of the most effective tools for managing your Child's Property is holding your assets in a Living Trust that will become a Support Trust for your child in your absence.

TRUSTS THAT PROVIDE FOR MINOR CHILDREN

Spendthrift Trust. A trust created to provide a fund for the support of a beneficiary, often a minor and protect the fund from the minor's improvidence. The Spendthrift Trust typically restricts the right of a beneficiary to transfer or assign his or her interest in the trust, thereby limiting the right of the beneficiary's creditors to reach the beneficiary's interest by legal process.

Sprinkling Support Trust. A Sprinkling Trust gives your Trustee the power to distribute Trust assets as he or she sees fit, in light of your wishes expressed in the Trust document and the needs of your children. This provides the Trustee with flexibility and discretion to respond to the changing financial needs of your family.

Qualified Terminable Interest Property Trust (QTIP). A QTIP Trust is a type of Trust often used as a wealth-transfer vehicle by individuals who have been married more than once. The testamentary QTIP Trust becomes irrevocable at death. After your death, the QTIP provides lifetime income to your spouse. Upon your spouse's death, remaining QTIP Trust assets are transferred to your chosen heirs (for example, children from a previous marriage).

COORDINATING TAX PLANNING WITH GIFTS TO MINORS

Coordinating Tax Planning with Gifts to Minors requires a technical understanding of Income Tax law and Federal Gift & Estate Tax law. Whether the Tax Planning Techniques briefly summarized here are appropriate for you can only be determined by your Tax Planning professional.

Annual Exclusion Trusts for Minors. A well-coordinated Estate Tax Plan can reduce Federal Gift & Estate Tax liability by using the Annual Exclusion in conjunction with establishing a savings account for the support of the minor. You can reduce the size of your taxable estate by using your Annual Exclusion to transfer gifts to an unlimited number of donees each year without using your Applicable Exclusion Amount. However, your gift will qualify for the Annual Exclusion only if the donee has a "present interest" in the gift, not a future interest (i.e., gifts held in trust until the minor reaches a certain age). As a result, there are limitations on the types of Trusts that the IRS has approved as providing a minor child with a "present interest" that will preserve the Annual Exclusion of the donor.

"Section 2503 Trust." Gifts transferred to a Section 2503 Trust have been approved by the IRS to qualify for the Annual Exclusion. Briefly, a Section 2035 Trust for the benefit of a minor works as follows: a parent or grandparent looking to move assets out of his or her estate transfers property to the trust under terms that allow the trustee to accumulate income or pay it out to or for benefit of the child beneficiary. However, once the child reaches age 21, all principal and income accumulated in the trust must be distributed to the child. This type of trust will enable parents or grandparents to reduce the size of their taxable estate by coordinating their gifts with the Annual Exclusion while preserving their Applicable Exclusion Amount.

"Window Trust." Many people are reluctant to permit the beneficiary of a Section 2503 Trust to have full possession of all of the trust property when the beneficiary reaches age 21. Although the IRS requires that undistributed property and income must pass to the beneficiary when the beneficiary reaches age 21, this requirement is met if the beneficiary has a right to terminate the trust upon reaching age 21. A trust that gives the beneficiary the right to terminate the trust during a specified period after the beneficiary's 21st birthday is sometimes called a "Window Trust." After the right to terminate the trust will continue under terms of the trust.

Family Limited Partnership ("FLP"). Many people are reluctant to permit the beneficiary of a Section 2503 Trust or "Window Trust" to have full possession of all of the trust property when the beneficiary reaches age 21. One Estate Planning strategy that can be used to avoid this problem is using a FLP. The Trustee (normally the parent) will purchase a FLP interest with the trust funds. The child is named as a limited partner (with no management and control) and the Trustee is named the general partner (with full management and control). The technique will result in the parent retaining control of the FLP assets as a general partner after the child reaches the age of majority.

Life Insurance "Crummey" Trust. A "Crummey" trust (named after a famous case, I.R.S. v. Dr. Crummey) is an irrevocable life insurance trust that qualifies for the Annual Exclusion. Each time a contribution is made to the trust to buy Life Insurance, the beneficiary must have a temporary right to demand withdrawals from the trust assets equal to the value of the gift (a "present interest"). Coordinating the purchase of Life Insurance with the Annual Exclusion can provide your child with a financial safety net that is free of Federal Gift & Estate Tax liability. (see discussion on Creating Wealth with the Life Insurance Trust "ILIT").

 

NOTE: Whether the Tax Planning Techniques briefly summarized here are appropriate for your general understanding of the Tax Planning Technique but and informed decision as to the appropriate Tax Planning Technique can only be determined by meeting with  your Tax Planning professional.