How Can Trusts Be Used to Manage Assets for Minor Children?

How Can I Use a California Trust to Manage Assets for Minor Children?

Trusts are a secure and reliable way to pass your legacy to the next generation. By placing assets in a trust, you can control when and how minor children receive their inheritance. California offers several trust configurations that allow you to use the arrangement that is just right for your family.

What is a Trust and How Does It Work?

Understanding the components of a trust is key to understanding the whole:

• Trustor: The person who creates a trust and places their assets in it, also called a grantor.
• Trustee: The person or organization who manages the trust’s assets.
• Beneficiary: The individuals or groups who benefit from the trust’s assets or income.

Understanding these definitions, the arrangement of a trust may be easier to grasp. A trust is a legally created relationship in which the trustor transfers assets to the trustee who manages or holds them for the benefit of the beneficiary, as defined in California Probate Code Section 15200. This arrangement is made in a document called a trust agreement or a declaration of trust. This legal instrument provides the foundation for a trust and outlines its terms and conditions.

Why Should I Use a Trust?

There are several reasons people choose to use a California trust, including the following:

• To ensure a trusted person controls the assets.
• To avoid the costly and time-consuming probate process.
• To ensure funds are used only for the child’s benefit (such as for healthcare or education).

What Types of Trusts for Minors Are Available in California?

Each California trust type has a slightly different configuration with different benefits.

Revocable Living Trust

A revocable living trust is established during the life of the grantor. The grantor funds the trust and retains full control over its assets during their lifetime. They may “revoke” the trust and its intended minor beneficiaries at any time or can amend it as needed. At death, or due to the grantor’s incapacitation, the trust’s assets transfer smoothly to the trustee for the minors’ benefit without requiring a public, court-supervised asset review.

Irrevocable Trust

An irrevocable trust cannot be changed once it has been created. Because of its structure, it can benefit the trustor by shielding assets from creditors, legal claims, and taxes while ensuring that those assets will always be used for their intended purposes. The grantor can benefit from the assets of an irrevocable trust, but how this is achieved should be carefully balanced by an experienced estate planning lawyer. If the trust is misused for personal gain only, instead of operating as a separate legal entity, the IRS may still consider it part of your taxable estate. By protecting your assets in an irrevocable trust, you can qualify for Medicaid while preserving assets for your heirs.

The benefits of an irrevocable trust include:

• Reduction of estate taxes
• Protection of assets
• Planning for medical expenses
• Providing for a special needs child
• Ability to support charity while reducing income taxes
• Preserving generational wealth
• Preparation for smooth family business succession

Testamentary Trust

A testamentary trust is created through a will and becomes active only after the grantor’s death. Unlike living trusts, they do not operate during the trustor’s lifetime. The will outlines the terms and conditions, including who the trustee responsible will be and who the minor beneficiaries will be. Because they are established through a will, testamentary trusts must go through the court process of probate before they become active. Probate is when a last will and testament is verified as valid in court.

Irrevocable Life Insurance Trust

The irrevocable life insurance trust (ILIT) has many qualities similar to an irrevocable trust but is explicitly used to hold life insurance policies as the chosen assets. Instead of you owning your life insurance policy, it becomes owned by the trust. According to the trust’s directives, any income or annuities will go to the trust and be directed to the minor beneficiary. The needs of the minor could be health, education, or basic living necessities.

Education Trust

An education trust is a specific trust type that has education as its sole purpose. This could be for children or grandchildren and is set up within the bounds of the three main categories of trusts: revocable living trust, irrevocable trust, and testamentary trust. With one of these types, a trust can be structured only to provide funding and use assets for education-related purposes, such as tuition, books, and living costs. Usually, an education trust is a component of a larger trust that may have additional purposes.

Special Needs Trust

A special needs trust (SNT) can be created to look after the needs of children with disabilities while ensuring their inheritance does not disqualify them from government assistance, like Disabled Supplemental Security Income (DSSI) or the income requirements to receive Medi-Cal. The grantor places assets in either a revocable, irrevocable, or testamentary type trust where a trustee will direct their use for the care of the minor beneficiary. Unlike most trusts for minors, which will expire or provide the entire inheritance to the adult child at a certain point, SNTs will continue to function as long as the child lives to provide life-long care for their needs.

Key Considerations While Creating a California Trust for Minors

As you prepare your assets to form a trust benefiting your minor family members, consider the following points in forming your trust:

• Trustee selection: Make sure the person in charge of the trust funds is responsible, trustworthy, and financially savvy. Be sure the person knows you are selecting them and has agreed to take the position.
• Incremental distribution: If you would like the assets to be dispersed at timed intervals, such as at 18, 21, and 25, make sure this is specified in the trust agreement.
• Lump sum inheritance: Some grantors choose to provide the full inheritance to the child once they have reached a certain age. The age could be 18 or as late as 30, as you determine suitable.
• Successor trustee: Adding a secondary option for the designated trustee is a wise idea to ensure your assets are in good hands in case your first choice is unable or unwilling to fill the position when the time comes.

Secure a Brighter Future for Those You Love

You have built a life. Let us help you preserve that wealth for future generations. At Cava & Faulkner, we focus on the long game. High-quality, legally-sound trust planning now can make the future secure and bright for your children and grandchildren. We know how it feels to have peace of mind that what you have built today will continue to provide for those you love tomorrow. We offer free consultations. Call us today at 916-831-7565 to schedule yours.