The attorneys with the Law Offices of Nay & Friedenberg discuss the best way to gift money to a minor.
Sometimes parents, grandparents, other relatives and friends want to make gifts of a significant value to minor children. Gifts to minors must be held by an adult. Minors may receive gifts via a conservatorship, trust, or custodian. The conservatorship is the most formal, restrictive form of control, and a custodianship is the least formal and least restrictive. Trusts are not as formal as conservatorships, but they can be very restrictive. Anyone holding money for another person, whether by conservatorship, trust, or custodianship, is a fiduciary and is held to a high standard of responsibility.
Conservator. A conservator is appointed by a judge to manage funds for the minor. The conservator must post a bond, file annual reports, and follow the judge’s orders. A conservator’s authority ends when the minor is 18. At that time, the funds are transferred directly to the recipient.
Generally, it is preferable to avoid conservatorships because of the high cost associated with them. Conservators are often required to be represented by attorneys. Both attorneys and conservators may be paid their fees from the minor’s funds with court approval. There are other costs, such as court fees, bond premiums, and other expenses of administration which are properly paid out of the minor’s money.
Trust. A trust is an entity established by a Trustor (person making the gift) to be managed by a Trustee for the benefit of the minor. The gift is then transferred to ownership of the Trust for the benefit of the minor. The terms of the trust directs when and how the Trustee may use trust funds. Sometimes the Trustee is limited to making expenditures for only education related expenses or other terms set by the Trust. The funds remain in the Trust until the time set by the Trustor. Usually, the Trustors set it to terminate when the beneficiary reaches an age that it can be assumed that a requisite level of maturity has been achieved, such as age 25 or 30. The Trust can also go on for the remainder of the beneficiary’s life.
A Trustee is not required to be bonded or report to the court. The Trustee must report to the beneficiary (or the beneficiary’s parent or guardian or other representative) on an annual basis, or more frequently. A Trustee may be compensated out of the Trust funds. The beneficiaries may seek an order from a court on any matter involving the Trust if necessary. Trusts are generally much less expensive to administer than conservatorships.
Trusts are useful for a variety of reasons. The main benefit to the Trustor is the ability to maintain very tight control over how the funds are spent and the age at which the minor finally receives the funds outright. If the amount of the gift is large, then it will be beneficial to the beneficiary to have the funds held in an irrevocable trust because the funds will not be attributed to them in applying for financial aid for college expenses.
Custodian. A custodial account may be established to hold gifts to the minor through the Uniform Transfer to Minor Act (UTMA). (Custodial accounts are sometimes referred to as UTMA accounts.) Unlike a conservatorship, there are no requirements to have a bond, report on a regular basis, or be under the supervision of the court. Unlike a trust, a custodian does not have to provide annual reports to the beneficiary. Nevertheless, a custodian (the adult managing the funds) has fiduciary duties to the minor to use the funds in the minor’s best interests. The custodian must keep the funds separate from other funds and keep meticulous records of all custodial funds. Minors who are 14 or older, or other interested persons, may petition a court for an order compelling the custodian to do something, such as provide an accounting or make a disbursement. The custodianship will end at the minor’s 21st birthday, unless the giver of the gift delays the transfer. The transfer may be delayed until any time between the beneficiary’s 21st and 25th birthdays.
Custodianships are very useful when there is no need for court supervision, the money to be managed is relatively small, and there is no concern about the minor receiving the funds between ages 21 and 25. For minors looking to go to college, funds held in a custodial account will be attributed to them in financial aid applications. Aid formulas typically expect 35% of assets in the student’s name to be spent on their education on a yearly basis. A custodial account could reduce the total aid package offered to them.
Conclusion
For most people, a custodial account is sufficient to allow them to make a gift. Trusts are useful when there is a lot of money involved and/or when the Trustor wants to keep the funds in Trust for longer than 18, 21, or 25 years. A conservatorship is rarely necessary to receive gifts unless there is already one established or there are unusual circumstances.
An experienced estate planning attorney makes all the difference in making sure you have the proper documents to fit your family’s needs. Contact the Estate Planning attorneys with the Law Offices of Nay & Friedenberg in Portland, Oregon at (503) 245-0894 to set an appointment.