Estate Planning for Minors

Many of our clients have plans that involve minor children as beneficiaries. Minors, whether they are children, grandchildren, nieces or nephews, or other intended beneficiaries, require special planning considerations.

There are many simple ways to provide for minors, including outright gifts of money or property; naming a minor as a beneficiary of a retirement plan or life insurance policy; or creating a uniform transfer to minor account (UTMA/UGMA). Simple, however, is not always better, and these gifting strategies do not address a minor’s potential immaturity or inability to handle an inheritance, nor do they protect an inheritance from an unforeseen circumstance or future creditor. These concerns call for a more thoughtful approach when planning for minor beneficiaries. A carefully designed trust is the superior estate planning tool to prevent a minor child from squandering his or her inheritance and to protect the funds from unanticipated future creditor claims.

Thus, planning for minors should consider the following:

  • different types of trusts commonly used in estate plans involving minor beneficiaries,
  • important protective provisions that should be included within each trust,
  • tips for choosing the right trustee, and
  • non-judicial remedies that can build flexibility into a trust.

Common Types of Trusts for Minors

In basic terms, a trust is an agreement made between at least three parties: the trust creator (grantor), the trustee, and the beneficiary or beneficiaries. The grantor creates the trust and “funds” it with assets to be overseen by the trustee for the benefit of the intended beneficiaries. The written trust agreement provides instructions for how the trust is to be managed on behalf of and distributed to the beneficiaries.

When planning for minors, many different trusts can be used depending on a client’s overall estate planning goals and objectives. Testamentary trusts are established under a will and can contain provisions specific to minor beneficiaries. These trusts do not technically exist until the will-maker (testator) dies, at which time probate must occur. It is through probate (also called estate administration) that the testamentary trusts are established. Probate is a court-supervised procedure which can take an extended period to complete and which can result in continuous court oversight and involvement. The will, having been filed with the court to initiate probate, is now available to the public. Because of the delay and lack of privacy involved in probate, testamentary trusts are often not the best tool for estates involving minor beneficiaries.

Alternatively, a revocable living trust can serve as the foundation of an estate plan when minors are beneficiaries. One major benefit of using a revocable trust is that, when properly funded, it can be used to avoid probate at the grantor’s death, eliminating the risk of a minor beneficiary’s inheritance being discovered by an unscrupulous person. A revocable living trust can also eliminate unnecessary delays in the availability of funds to a minor beneficiary who may—more than any other beneficiary—need the funds immediately for his or her basic care and needs.

When a client has estate tax concerns or other more sophisticated estate planning needs, additional trusts may be incorporated into an estate plan:

Irrevocable Trust: After the foundational revocable trust, an irrevocable “Gifting Trust” (GT) may be a logical next step for clients who want to transfer wealth to other family members, including minors. This type of can be used both for annual gifts and for lump sum gifts. A GT can be administered by either the grantor himself or herself or a third-party trustee. By giving the trustee absolute discretion in making distributions to the trust’s beneficiaries, a GT can provide a level of asset protection to beneficiaries. Depending on whether children or grandchildren will be the ultimate beneficiaries of a GT, further generation skipping transfer-tax (GSTT) planning may be needed.

Irrevocable Life Insurance Trust (ILIT): This type of trust is often used for clients requiring a higher level of estate tax planning. An ILIT is an irrevocable trust that serves as both the owner and beneficiary of a life insurance policy. A properly drafted and funded ILIT removes the death benefit of an insurance policy from the insured’s estate, which potentially saves estate tax and can also provide continued management of the insurance proceeds for the trust’s beneficiaries. This combination of estate tax savings plus continued management of trust assets can make an ILIT an excellent choice for protecting a minor’s interests.

Health and Education Exclusion Trust (HEET): A HEET is a multi-generational trust that allows the grantor to set aside money for the health and education of future generations. This sophisticated tool is appropriate for clients who want to provide for children, grandchildren, great-grandchildren, or other minor beneficiaries; have GSTT concerns, and are charitably inclined. HEETs have specific requirements and restrictions, including the grantor naming at least one charitable beneficiary, guaranteeing or defining the distributions to be made to a charitable beneficiary, and disallowing distributions made directly to an individual beneficiary.  Medical bills for individual beneficiaries, including payments for health insurance premiums, are allowable from this type of trust. The trustee may also pay for a beneficiary’s educational expenses—from kindergarten to graduate school—so long as payments are made directly to the educational institution. There are many ways to fund a HEET, though common methods are through the use of a grantor’s annual exclusion, lifetime exclusion, or a life insurance policy.

Section 2503(c) “Minor’s Trust”: A Minor’s Trust may be used to provide for a minor until he or she reaches the age of 21. When drafted properly, contributions to this irrevocable trust qualify for the gift tax annual exclusion and can provide GST savings when created for grandchildren.  While the minor beneficiary is under age 21, the trustee has the authority to make distributions for the minor as defined by the grantor. Retained trust income is taxed to the trust itself. If the minor dies before reaching age 21, the trust is included in the minor’s estate and, if one was granted, may be distributed according to the minor’s exercise of a power of appointment. Upon reaching the age of 21, the minor can be given the right to withdraw the entire balance of the trust. This withdrawal right can be temporary, allowing withdrawal for at least 30 days, after which time the trust continues until a defined later date. The withdrawal right may also be permanent, enabling the beneficiary to access the balance of the trust immediately upon reaching age 21. In either withdrawal scenario, this trust may not be suitable for an inexperienced and perhaps immature young adult who may not handle a lump sum responsibly.

Standalone Retirement Trust (SRT): Though a minor can be easily named as a beneficiary of a retirement account, this method of passing assets such as IRAs, 401ks, and other qualified retirement plans to a minor may not be the best approach for many reasons. One reason is a lack of asset protection for the beneficiary. After the 2014 U.S. Supreme Court case, Clark v. Rameker (134 S. Ct. 2242 (2014)), retirement accounts inherited by a non-spouse beneficiary are not exempt from creditor claims in bankruptcy. Another reason outright inheritance of a retirement account is not optimal is the lack of control over how a beneficiary uses the money. If a minor inherits a retirement account, he or she has unfettered access to it when he or she reaches either 18 or 21 (depending on the laws of the state where the beneficiary lives). While a responsible young adult may take advantage of stretching withdrawals to continue tax savings, there is no way to guarantee that he or she won’t make an early withdrawal (resulting in a huge tax bill) and buy a Ferrari. An SRT can prevent both of these scenarios, protecting the retirement accounts from the minor’s creditors and prescribing what distributions, if any, can be made to the minor beneficiary. An SRT is a sophisticated planning tool and must be drafted with care to ensure it is a “qualified beneficiary” to receive retirement accounts and continue the “stretch-out” of distributions.

Protective Trust Provisions

Choosing the right type of trust is just part of the solution when planning for minor beneficiaries. Including certain provisions in any trust can protect minors from creditors, predators, or the mistakes of youth. In fact, carefully drafted provisions within a trust itself provide the greatest opportunity to leave a thoughtful legacy for minor beneficiaries, protecting beneficiaries from themselves and others. Here are some common provisions:

Incentive provisions: Grantors often worry that a minor beneficiary may become the quintessential “trust fund kid,” using the trust to escape responsibility, growing up lacking proper self-motivation, or failing to become self-sufficient and provide for those dependent on them. Incentive provisions can be added to a trust to encourage the beneficiary to engage in positive behaviors such as donating time and money to charitable causes, engaging in creative or cultural activities, showing empathy towards others, or maintaining healthy relationships. Incentive provisions can also require a beneficiary to obtain a certain level of education, reach a particular age before receiving a distribution, demonstrate the ability to handle money, or be gainfully employed.

Spendthrift provisions: When a spendthrift provision is included in a trust, it provides a higher level of asset protection than would otherwise exist without it. Grantors often worry a minor beneficiary may spend his or her inheritance away—either knowingly or by getting into debt or other legal trouble. A spendthrift provision voids any attempt by a beneficiary to assign his or her interest in the trust to another, such as a creditor, and also prevent a creditor from reaching the trust principal.

“Bad behavior” clause: Another common concern among grantors is that unfettered access to money will result in a minor beneficiary engaging in harmful activities or falling prey to abuse or addiction. Exorbitant spending, abuse of drugs or alcohol, gambling, or involvement in criminal activities are among the issues so-called “bad behavior” clauses are aimed to address or prevent. Similar to an incentive provision, which encourages and even rewards a beneficiary’s behavior and choices, bad behavior clauses can address various negative behaviors a beneficiary may engage in or be at risk for. A carefully drafted bad behavior clause can deter the beneficiary from participating in certain harmful behaviors, such as drug abuse or gambling, by allowing a trustee to turn the trust “spigot” off for future trust distributions until the beneficiary rehabilitates himself or herself. To promote and assist with the rehabilitation, the trustee may be permitted to use funds from the beneficiary’s trust for the beneficiary’s counseling or treatment. Once a beneficiary is sufficiently rehabilitated, trust distributions may be reinstated by the trustee.

Stand-by supplemental needs provisions: If a beneficiary unexpectedly becomes disabled, incapacitated, or is otherwise unable to care for himself or herself, the beneficiary may be unable to manage an inheritance on his or her own. Even worse, the beneficiary may be disqualified from receiving much-needed government aid and assistance because of the inheritance. Most common trusts are considered a “countable asset” when a disabled beneficiary applies for aid, and the beneficiary must then “spend down” the trust before receiving assistance. The stand-by supplemental needs trust allows the trustee to convert an otherwise disqualifying trust to one that does not affect the beneficiary’s eligibility, while still allowing those needs not covered by the government program to be supplemented by the trust.

Choosing the Right Trustee

Naming a trustee to oversee a minor’s inheritance is perhaps the most important decision a grantor will make. The most logical choice for a trustee of a minor’s trust may be the minor’s parent or guardian. However, a parent or guardian may be overwhelmed by the day-to-day responsibility of raising a minor child and may not have the time or the skill set needed to serve as a trustee. Naming another relative or trusted friend may be a good alternative, although a growing number of grantors are opting for professional fiduciaries. Here are some counseling tips for choosing the trustee:

  • Expertise is not required. A trustee is a fiduciary required to perform certain tasks and bound by duties owed to the trust’s beneficiaries. However, the individual selected need not be in the financial industry to be qualified to serve as a trustee. It is important to select a trustee with good judgment and common sense. For example, the trustee must be comfortable doing research and asking for help.
  • Consider the trustee’s age. Because a trust for a minor is likely to be administered for a significant length of time—decades or longer—it is prudent to consider the age and health of a potential trustee. Naming multiple successor trustees and revisiting their appropriateness is critical.
  • Consider the team approach. In some circumstances, naming more than one trustee may be appropriate. Some benefits of having co-trustees are the sharing of administrative duties and preventing one person’s judgment from controlling all decisions and distributions. Drafting co-trustee provisions to alleviate administrative hassle (are both signatures required to conduct business on behalf of the trust?) and prevent conflict (if there are only two trustees, who will settle a stalemate?) is imperative. The role of trustee can also be split by having one trustee who is responsible for distribution decisions while having a second trustee be responsible for investment decisions.
  • Sometimes a professional trustee is best. When the trust contains a large amount of money or there are concerns about family conflicts, a professional or institutional trustee may be best.

Include a Trust Protector and Decanting Authority

Even in the most thought-out plans, things can go awry. Rogue trustees, changes in the law, and other unforeseen circumstances can defeat a grantor’s original intent. There was a time when judicial intervention was the only course of action. However, asking a court to reform a trust or otherwise intervene to fix a problem is a time-consuming and expensive remedy. Today, the appointment of a trust protector, coupled with the inclusion of other non-judicial remedies within a trust, can provide peace of mind to the grantor and ensure a trust’s viability over time.

Trust protector: A trust protector is a neutral third-party, unrelated to the grantor, trustee, or beneficiaries. Some common powers bestowed upon a trust protector are the ability to direct a trustee, appoint a new trustee, amend a trust, and change the situs of the trust. When a trust is created for a young minor child or is intended to provide for descendants for several generations, a trust protector can aid in ensuring a grantor’s intent is honored in spite of legal changes. The trust agreement can name a trust protector or allow for a court to appoint a trust protector upon nomination by an interested person. A trust protector can serve in a fiduciary or non-fiduciary capacity and is often completely free of judicial oversight. The trust protector’s role can be limited or expansive—depending on the duration of the trust.

Decanting: Authorized by statute in 28 states, trust decanting is the process of pouring assets from an old irrevocable trust into a new irrevocable trust. Decanting is initiated by a trustee who owes a fiduciary duty to the beneficiaries and who must ensure the new trust considers all beneficiaries. Even if decanting is not allowed in the situs of trust administration, a trustee with authority to change the situs of a trust may simply move the trust’s administration to a state that allows decanting. Rather than solely relying on the state’s decanting statute, it is prudent to specifically authorize decanting in the trust agreement itself. When a minor child is a beneficiary of a trust, or a trust is designed for generations to come, decanting can be a non-judicial remedy to fix a broken trust with minimal delay and at significant savings to the trust.


Trusts involving minors require special consideration. Depending on the ultimate estate planning goals of the client, there are many trusts to choose from. Within each trust, a trustmaker/grantor should include provisions aimed at protecting the minor beneficiary’s inheritance from creditors and from the impulses of youth. Great care should be taken when choosing the right trustee. Finally, allowing flexibility for unforeseen circumstances and changes in the law is particularly important for trusts that will be administered for years—or even generations—to come.